Buying a business with limited equity: the structure that holds
You can buy a business with little equity by stacking several sources of capital: senior bank debt (50 to 60 percent of the price), a vendor loan (10 to 30 percent), sometimes an earn out, and your own equity on top. With a disciplined structure, putting in 10 to 20 percent of the price is often enough to close a sound deal. The only test that matters is not the price but the cash flow: debt service must fit inside the target’s available flows with a coverage ratio (DSCR) of at least 1.5.
Plenty of capable buyers give up before they even start, convinced they need to own 40 or 50 percent of the price to acquire a company. They are wrong. Buying an SME or a startup has never been a cash purchase: it is an assembly of several sources of capital, and equity is only one layer of it. What sets a good buyer apart is rarely the size of the check. It is knowing how to stack the right instruments in the right order, within what the target’s cash flows can genuinely bear. Among the buyers we work with, the ones who reach closing are seldom the best funded; they are the ones who structured cleanly. A disciplined structure, and 10 to 20 percent of the price is often enough.
The financing stack: think in layers
An acquisition is financed like a tiered cake, where each layer carries a different rank, cost and level of risk. Senior bank debt sits at the bottom: the cheapest money, repaid first, but the most demanding on collateral and covenants. Above it sit the subordinated instruments, the vendor loan and mezzanine debt, which accept repayment after the bank in exchange for a higher return. Right at the top is your equity, which absorbs the risk first and receives nothing until the layers beneath it have been paid. Understanding this hierarchy is decisive: every euro you push onto a subordinated layer is a euro of equity you do not have to find.
- Senior bank debt: typically 50 to 60 percent of the price for a profitable target, repaid over five to seven years, secured on the assets and the business.
- Vendor loan: 10 to 30 percent of the price, ranking behind the bank, usually repaid over three to five years, sometimes after a grace period.
- Mezzanine debt or an honor loan: an optional middle layer, more expensive, used to bridge a financing gap without diluting your control.
- Equity: your own contribution and the balance of the financing, which must stay large enough to leave a reserve after closing.
The vendor loan: your best ally
The vendor loan is the most powerful instrument available to a buyer who is short on equity, and the most overlooked. The principle is simple: the seller agrees not to collect part of the price at closing, and instead lets the company repay it over several years. Beyond cutting the cash you have to put up, the vendor loan sends a decisive signal. If the seller is willing to wait, it is because they trust the soundness of what they are handing over. A seller who insists on 100 percent cash at closing is telling you, without saying it, that they would rather be long gone the day the problems surface.
A seller who rules out any vendor loan is not driving a hard bargain, they are giving you a signal. Either they doubt their own business, or they need the cash for reasons that should concern you.
Negotiate the vendor loan on three fronts, not just the amount. First the term: the longer the repayment is spread, the lighter it sits on your cash in the early years. Then the grace period: securing one or two years with no principal due gives the business time to absorb the senior debt. Finally the ranking: the vendor loan must be expressly repaid after the bank, or no senior lender will back you. A good vendor loan of 20 to 25 percent of the price, ranked behind the bank and with a grace period, turns an impossible structure into a financeable deal.
The earn out: paying part on future results
When you and the seller cannot agree on price, often because they are pricing in growth you find uncertain, the earn out bridges the gap. Part of the price becomes conditional: it is paid only if the business hits targets set in advance, whether revenue, EBITDA or margin, over the two or three years after the takeover. For a buyer who is short on equity the benefit is twofold. You cut the cash you have to put up at closing, and you pay the growth premium only if that growth actually arrives.
The earn out does carry a well known trap: the fight over what counts. If the seller stays involved and you reorganize the business, who is to blame for a missed target? I have watched a revenue based earn out slide into a lawsuit because the buyer, with perfectly sound industrial logic, discontinued a thin margin line that the seller had counted toward the target. Anchor the earn out on a few simple metrics that are hard to game and clearly defined in the contract. Favor EBITDA over revenue, which is far too easy to inflate, and set limits on the decisions you can take during the period. A poorly drafted earn out breeds more litigation than it ever saves in cash.
A worked example
Take a target priced at 2 million euros, a services business with normalized EBITDA of €500,000. You have €300,000 of equity, or 15 percent of the price. On paper that is far too little for a cash purchase. Built in layers, the deal becomes very workable: 1.1 million of senior bank debt (55 percent), €450,000 of vendor loan ranked behind the bank with a one year grace period (22.5 percent), €150,000 of conditional earn out over two years (7.5 percent), and your €300,000 of equity (15 percent). The price is met without your having to find a single euro more.
What is left is to check that the target can actually carry the stack. The test is never the price, always the cash flow. From EBITDA of €500,000, subtract maintenance capex, the change in working capital, tax and your own pay: say €280,000 of cash is genuinely free to service debt. Once the grace period is over, the senior debt and the vendor loan together must fit inside that figure with a coverage ratio (DSCR) of at least 1.5. If total debt service runs past €185,000 a year, the structure is too heavy, however much the target excites you.
- The smaller the equity slice, the more the stack reacts to any dip in cash: a 15 percent contribution demands a stable target and predictable flows.
- Always hold a cash reserve after closing worth six to twelve months of debt service, never zero.
- The vendor loan grace period and the earn out should soak up the dip of the first year, the riskiest in any takeover.
- Stress test the stack: if cash flow falls 20 percent and the DSCR drops below 1.1, reduce the debt or renegotiate the price.
Buying a business with limited equity is not financial sleight of hand, it is sober engineering: making the right layers carry the price, in the right order, never beyond what the target’s flows can repay. The danger is not running short of equity, it is building a stack the business cannot sustain through its first hard winter. Before you sign the letter of intent, stress test your structure: a rigorous buy side acquisition analysis and due diligence, sizing the target’s debt capacity layer by layer, will tell you which structure holds and which would put you at risk.
Key points
- An acquisition is financed in layers: senior debt at the bottom, vendor loan and mezzanine in the middle, equity on top, from cheapest to riskiest.
- The vendor loan is the strongest lever for a buyer short on equity: negotiate the term, the grace period and the ranking, not just the amount.
- An earn out makes part of the price conditional on future results; anchor it on EBITDA, not revenue, which is too easy to inflate.
- The real test is not the price but whether the target can carry the debt: a DSCR of at least 1.5 on genuinely free cash flow.
- Keep a cash reserve after closing: a 15 percent contribution leaves no margin for error.
Frequently asked questions
How much equity do you really need to buy a business?
There is no legal floor, but in practice 10 to 20 percent of the price is what lets you convince a bank and keep a reserve after closing. Below 10 percent the structure becomes very sensitive to any cash hiccup, and most lenders walk away. What matters more than the percentage is whether the target throws off enough cash to repay every layer you have stacked.
Will a bank actually finance a deal without a large down payment?
A bank follows more willingly when the rest of the structure protects it: a subordinated vendor loan, real personal equity, and a target with steady flows. Bring a cash plan that shows debt service covered even in a downside case. The banker is not funding your enthusiasm, they are funding a cash flow they can verify.
How do you negotiate a vendor loan without offending the seller?
Frame it as sharing the risk, not as a favor you are begging for. A seller who collects 75 to 80 percent of the price at closing and the rest over three years is still very well paid, while signaling confidence to you and to the bank. Present the grace period and the ranking as the condition that makes the deal financeable, which is exactly what secures their own repayment.
What if the target cannot carry the debt service?
That is the scenario to rule out before you sign, not after. A debt capacity test in a downside case (cash flow down 20 percent, DSCR under 1.1) tells you whether the structure holds or collapses at the first hard winter. If it does not hold, the answer is to cut the debt, extend the vendor loan or renegotiate the price, never to hope the flows will catch up.
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