Financing the acquisition of an SME: all options in Switzerland

Assessing your financing needs: the starting point

Before seeking financing, you must calculate precisely the total amount needed for your acquisition project. This assessment forms the basis of your business acquisition financing plan.

The amount to be financed comprises three essential components:

• The acquisition price: the value of the business negotiated with the seller
• Working capital: the liquidity needed to maintain operations during the first months
• Ancillary costs: notary fees (1-2%), legal and tax advice (5-10K CHF), due diligence (10-30K CHF depending on size), bank charges

The first step therefore consists of obtaining a precise valuation of the target business. This valuation will determine the acquisition price and, by extension, your entire financing structure.

General rule: banks and investors require a personal contribution of 20 to 30% minimum of the total amount. This ratio demonstrates your commitment and reduces the risk for financiers. The higher your personal contribution, the better your financing conditions will be.

Use Leez's free valuation tool to obtain an initial estimate and refine your financing needs calculation.

Equity: the essential foundation

Personal contribution constitutes the foundation of any business acquisition project. Without sufficient equity, no bank or investor will agree to finance your acquisition.

This personal contribution fulfils several strategic functions:

• Credibility: it demonstrates your financial commitment and confidence in the project
• Risk reduction: it decreases the exposure of external financiers
• Negotiating leverage: a high contribution improves your credit conditions
• Safety cushion: it offers room for manoeuvre in case of initial difficulties

Possible sources for building your personal contribution include:

• Personal savings and financial investments
• 2nd pillar: early withdrawal for self-employment (strict conditions)
• 3rd pillar: release for starting self-employment
• Inheritance or family gift
• Sale of personal assets (property, vehicles, etc.)
• Family loans (considered as quasi-equity by some banks)

Recommended amount and impact

Swiss banks generally expect a personal contribution representing 20 to 30% minimum of the total transaction amount. However, a contribution of 30 to 40% is considered ideal and opens the door to significantly more favourable conditions.

The impact of your personal contribution on your acquisition credit is direct:

• Interest rate: each additional 10% tranche of contribution can reduce your rate by 0.5 to 1 point
• Amount granted: a high contribution facilitates obtaining complementary financing
• Required guarantees: fewer personal guarantees with a substantial contribution
• Response time: applications with solid contributions are processed more quickly

For an acquisition of 1 million CHF, the difference between a contribution of 20% (200K) and 35% (350K) can represent a saving of 10,000 to 15,000 CHF in interest per year.

Advantages and limitations

Advantages of equity:

• Total autonomy: no repayment obligation or interest
• No dilution: you retain 100% control of the business
• Enhanced credibility: positive signal for all financial partners
• Flexibility: complete freedom in business management

Disadvantages and limitations:

• Limited liquidity: most acquirers do not have sufficient funds
• High personal risk: you commit your personal assets
• Reduced diversification: concentration of your wealth in a single asset
• Opportunity cost: these funds could be invested elsewhere

The key lies in balance: maximising your personal contribution to optimise financing conditions, whilst maintaining a safety reserve for unforeseen events.

Bank credit: the most common solution

Bank acquisition credit constitutes the main financing source for the majority of SME acquisitions in Switzerland. Swiss banks offer solutions specifically adapted to business acquisition projects.

Two types of bank credits are generally mobilised:

• Investment credit: finances the acquisition itself (purchase of shares, assets)
• Operating credit: ensures the working capital needed for the first months of activity

The main banks active in acquisition financing in Switzerland include UBS, Credit Suisse, Raiffeisen, cantonal banks and certain regional banks specialising in SME financing.

The bank credit amount typically represents 50 to 70% of the total acquisition price, complementing your personal contribution and possibly other financing sources.

Conditions for obtaining

Swiss banks assess your acquisition credit application according to several strict criteria:

Personal criteria:

• Personal contribution: 20-30% minimum of the total amount
• Professional experience: skills in the target business sector
• Management capabilities: managerial experience or adequate training
• Financial situation: credit history, income, assets

Criteria related to the target business:

• Profitability: positive and stable EBITDA over the last 3 years
• Financial strength: acceptable debt ratio, sufficient equity
• Prospects: growth potential and cash-flow generation
• Sector of activity: certain sectors are favoured (industry, B2B services)

Required guarantees:

• Pledge of shares in the acquired business
• Mortgage on property (personal or business)
• Personal guarantee from the acquirer
• Assignment of receivables or important contracts

Required documentation:

• Detailed business plan with financial forecasts over 3-5 years
• Last 3 balance sheets and profit and loss accounts of the target business
• Complete due diligence report
• Sale contract or letter of intent
• Detailed CV and professional references
• Tax return and personal asset statement

Rates and durations

The conditions for business acquisition financing vary according to your profile, the guarantees provided and the quality of the target business.

Interest rates in Switzerland (2024-2025):

• General range: 3% to 6% per year
• Excellent profile (40% contribution, solid guarantees): 3-4%
• Standard profile (25-30% contribution, normal guarantees): 4-5%
• Risk profile (20% contribution, limited guarantees): 5-6% or more

Typical durations:

• Acquisition credit: 5 to 10 years (7 years on average)
• Operating credit: 1 to 3 years, renewable
• Amortisation: progressive with possibility of partial deferral in the first year

Banks generally offer linear or decreasing amortisation, with fixed monthly payments. Some accept amortisation adapted to the business's cash-flow, with lower instalments in the first years.

Concrete example: For a credit of 700,000 CHF over 7 years at 4.5%, your monthly payments will amount to approximately 10,200 CHF, representing a total interest cost of 155,000 CHF over the duration.

Advantages and disadvantages

Advantages of bank credit:

• Large amounts: allows financing 50-70% of the acquisition
• Competitive rates: amongst the least expensive solutions (3-6%)
• Leverage effect: multiplies your investment capacity
• Tax deductibility: interest is deductible from taxable profit
• Retention of control: no capital dilution
• Banking relationship: establishes a relationship for future financing

Disadvantages and constraints:

• Required guarantees: personal commitment and mortgages often required
• Long process: 2 to 4 months between application and fund disbursement
• Strict criteria: high rejection rate for weak applications
• Personal commitment: joint and several guarantee frequently requested
• Financial pressure: fixed monthly payments regardless of performance
• Covenants: financial ratios to be respected under penalty of early repayment

Bank acquisition credit nevertheless remains the cornerstone of the majority of acquisition financing in Switzerland, thanks to its optimal cost-amount ratio.

Vendor loan: a powerful negotiating tool

The vendor loan is a mechanism where the seller finances part of the sale price themselves, typically between 10 and 30% of the total amount.

This arrangement presents a double advantage:

• For the acquirer: reduces the need for external financing and demonstrates to banks the seller's confidence
• For the seller: facilitates the sale, optimises taxation (spreading of income), and maintains a link with the business

The vendor loan constitutes an extremely positive signal for banks: if the seller agrees to defer part of the payment, it means they have confidence in the sustainability of their business and in the acquirer's capabilities.

This solution is particularly common in family business transfers and acquisitions by internal managers (Management Buy-Out).

Practical arrangements

Typical percentage:

• Standard: 10-20% of the sale price
• Favourable situations: up to 30-40% in certain family transfers
• Significant minimum: at least 50,000 CHF to have a real impact

Duration:

• Short: 3-5 years for modest amounts
• Standard: 5-7 years for the majority of cases
• Long: up to 10 years in certain family transfers

Interest rate:

• Generally lower than the bank rate: 2-4% per year
• Sometimes interest-free in family transfers
• The rate often reflects the relationship between seller and buyer

Important guarantees and clauses:

• Return clause: possibility for the seller to take back the business in case of payment default
• Subordination: the vendor loan is generally subordinated to the bank credit
• Pledge: guarantee on the company shares
• Earn-out: part of the price linked to the future performance of the business
• Transition period: support from the seller for a few months

When to favour this option

The vendor loan is particularly relevant in the following situations:

Acquirer profile:

• Limited personal contribution: you only have 15-20% of the amount
• Difficulty accessing credit: atypical profile or sector considered risky by banks
• Internal acquirer: manager or employee of the business known to the seller

Seller profile:

• Non-financial motivation: priority to business sustainability rather than immediate liquidity
• Tax optimisation: spreading of income over several years
• No urgency: no immediate need for liquidity
• Family transfer: desire to facilitate acquisition by a family member

Type of business:

• Family business: tradition of progressive transfer
• Niche SME: difficulty in precisely valuing the business
• Strong dependence: business closely linked to the seller's personality

Advantages and risks

Advantages of vendor loan:

• Facilitated access: reduces the financial barrier to entry
• Flexible conditions: direct negotiation with the seller, adaptable to your situation
• Positive signal: considerably strengthens your bank application
• Advantageous rate: generally lower than the bank rate
• Privileged relationship: facilitates the transition period and knowledge transfer

Disadvantages and risks:

• Strained relations: risk of conflict if payment difficulties
• Return clause: possibility of losing the business in case of default
• Pressure on cash flow: double repayment (bank + seller)
• Potential interference: the seller may be tempted to interfere in management
• Legal complexity: requires a detailed and well-drafted contract

The vendor loan works best when there is a relationship of trust between seller and acquirer, and both parties share a common vision of the transfer.

Mezzanine financing: bridging the gap

Mezzanine financing is a hybrid solution between debt and capital, used to bridge the gap between your equity, bank credit and the total acquisition price.

Called "mezzanine" because it sits between two floors of the financial structure:

• Above: equity
• Below: senior debt (bank credit)

This financing is said to be subordinated: in case of difficulty, mezzanine creditors are only repaid after banks, but before shareholders. This higher risk justifies a higher cost.

Mezzanine financing is offered by specialised funds, investment banks and certain financial institutions dedicated to Swiss SMEs.

Characteristics and conditions

Amounts:

• Generally represents 10 to 25% of the acquisition price
• Minimum amount: 200,000 to 500,000 CHF depending on funds
• Maximum amount: up to 5 million CHF for large operations

Cost:

• Interest rate: 8-12% per year (well above bank credit)
• Profit participation: often a supplement of 2-4% linked to performance
• Arrangement fees: 1-3% of the borrowed amount
• Total cost: can reach 10-15% per year all charges included

Duration:

• Standard: 5 to 7 years
• Repayment: often "bullet" (in one go at maturity) or with minimal amortisation
• Interest: quarterly or annual payment

Profile of eligible businesses:

• Minimum EBITDA: generally 500,000 CHF per year
• Stability: profitability track record over 3 years minimum
• Favoured sectors: industry, B2B services, established commerce
• Cash-flow: ability to support the additional financial burden

Advantages and constraints

Advantages of mezzanine financing:

• Reduces personal contribution: allows acquisition with less equity
• No personal guarantees: the risk rests on the business, not on you
• Improves structure: optimises the debt/equity ratio
• Flexibility: repayment adapted to the business's cash-flow
• No immediate dilution: you retain control (except specific clauses)

Disadvantages and constraints:

• High cost: 8-12% versus 3-6% for bank credit
• Restrictive covenants: strict financial ratios to be respected
• Demanding reporting: detailed quarterly reporting obligations
• Exit clauses: possibility of conversion into capital in case of difficulty
• Complexity: sophisticated legal and financial structuring
• Limited access: reserved for medium to large acquisitions

Mezzanine financing is particularly suitable when you have identified an attractive opportunity but your personal contribution and bank credit are not sufficient to complete the financing.

LBO (Leveraged Buy-Out): acquisition through leverage

The Swiss LBO (Leveraged Buy-Out) is an acquisition technique that consists of using the target business itself and its assets as collateral to finance its purchase.

Principle of the mechanism:

1. Creation of an acquisition holding company
2. The holding company borrows the funds needed for the acquisition
3. The holding company buys the target business with these borrowed funds
4. The two entities are then merged
5. The business's cash-flows are used to repay the acquisition debt

This technique allows the acquisition of significant businesses with a relatively limited personal contribution, thanks to maximum financial leverage.

Variants:

• LBO: acquisition by external investors
• LMBO (Leveraged Management Buy-Out): acquisition by the existing management team
• BIMBO (Buy-In Management Buy-Out): combination of internal and external managers

Conditions and structure

Profile of businesses suitable for LBO:

• Stable and predictable cash-flow: ability to generate regular liquidity
• Tangible assets: property, machinery, stock that can serve as collateral
• Significant EBITDA: generally minimum 1-2 million CHF per year
• Solid market position: sustainable and non-cyclical activity
• Low initial debt: available borrowing capacity

Typical financial structure of an LBO:

• Equity: 10-20% (acquirer's contribution + possible investors)
• Senior debt: 50-60% (classic bank credit)
• Mezzanine debt: 20-30% (subordinated financing)
• Vendor loan: 0-15% (depending on negotiation)

Role of actors:

• Banks: provide senior debt with guarantees on assets
• Mezzanine funds: complete financing with subordinated debt
• Private equity: can co-invest in equity
• Specialised advisers: structure the operation (lawyers, tax specialists, investment banks)

Overall cost:

• Weighted average interest rate: 5-8% depending on structure
• Structuring fees: 3-5% of the total transaction amount
• Repayment duration: typically 5-7 years

Advantages and risks

Advantages of LBO:

• Maximum leverage: acquisition with limited personal contribution (10-20%)
• Acquisition of significant businesses: access to SMEs worth several million CHF
• Tax optimisation: deductibility of interest on borrowings
• High return on investment: potential for significant gains if the operation succeeds
• No personal commitment: risk is limited to the equity contribution

Risks and constraints:

• High debt: significant financial burden weighing on the business
• Pressure on profitability: obligation to generate cash-flow quickly
• Economic vulnerability: any drop in activity jeopardises repayment
• Complexity: sophisticated legal and tax structuring requiring experts
• High cost: significant advisory and arrangement fees
• Reduced flexibility: strict banking covenants limiting strategic decisions

The Swiss LBO is a technique reserved for experienced acquirers and quality target businesses. It imperatively requires support from experts specialising in acquisition financing.

Private equity and investors: sharing the risk

Private equity consists of bringing investors into the business's capital in exchange for financing. Unlike debt, this is an equity contribution that does not generate a repayment burden.

In Switzerland, several types of investors can participate in financing an acquisition:

• Business angels: wealthy private investors, often entrepreneurs themselves
• Private equity funds: investment funds specialising in SMEs
• Regional funds: cantonal business support structures
• Family offices: family wealth management structures investing in SMEs
• Corporate venture: large companies investing in SMEs in their sector

These investors bring not only funds, but also their expertise, network and experience to support the business's development.

When to call on investors

Recourse to private equity is relevant in the following situations:

Significant amount:

• Acquisition of several million CHF exceeding your borrowing capacity
• Need for equity exceeding 500,000 CHF
• Desire to limit debt to preserve financial strength

High growth potential:

• Business with strong development potential requiring investments
• Opportunities for geographical expansion or diversification
• High-growth sector (technology, innovative services)

Need for complementary expertise:

• Lack of experience in certain areas (finance, marketing, international)
• Need for a professional network to accelerate development
• Search for a mentor or strategic adviser

Insufficient personal contribution:

• Difficulty in raising the 20-30% contribution required by banks
• Desire to diversify your assets rather than investing everything
• Sharing entrepreneurial risk with experienced partners

Advantages and trade-offs

Advantages of private equity:

• No debt: no repayment burden or interest
• Expertise contribution: strategic and operational support
• Professional network: access to clients, suppliers and partners
• Enhanced credibility: presence of recognised investors reassures banks and partners
• Risk sharing: investors assume part of the entrepreneurial risk
• Financial flexibility: preserves borrowing capacity for future investments

Trade-offs and constraints:

• Capital dilution: you give up 20-40% of the business on average
• Partial loss of control: important decisions requiring investors' agreement
• High profitability objectives: expectations of return on investment of 15-25% per year
• Exit horizon: funds generally plan an exit within 5-7 years
• Demanding reporting: transparency and regular reporting obligations
• Long process: 3-6 months to finalise the investment

Private equity is a powerful solution for ambitious projects, but it involves sharing ownership and strategic decisions with your investors.

Public aid and guarantees in Switzerland

Switzerland has several public schemes to facilitate business acquisition financing, mainly at cantonal level. These aids aim to support business transfers and preserve local employment.

Unlike other countries, Switzerland favours guarantee mechanisms (public guarantee of credits) rather than direct subsidies. These systems reduce risk for banks and facilitate access to credit.

Cantonal guarantees

Each Swiss canton has an SME guarantee organisation, grouped within the Coopérative de cautionnement romande (CCR) for French-speaking Switzerland and similar structures in German-speaking Switzerland.

Principle:

• The organisation stands as guarantor for up to 80% of the bank credit
• This reduces the bank's risk and facilitates obtaining credit
• The acquirer pays an annual commission (1-3% of the guaranteed amount)

Eligibility conditions:

• Maximum amount: varies by canton, typically 500,000 to 1,000,000 CHF
• Eligible sectors: most sectors (except property, finance, speculative activities)
• Criteria: viable project, acquirer's skills, sufficient personal contribution
• Location: business located in the canton concerned

Procedure:

1. Preparation of classic credit application
2. Simultaneous submission to the bank and guarantee organisation
3. Parallel analysis by both entities
4. Decision within 4-8 weeks

Main organisations:

• French-speaking Switzerland: Coopérative de cautionnement romande (CCR)
• German-speaking Switzerland: BG Genossenschaft, Bürgschaftsgenossenschaft
• Ticino: FIDEX

Other schemes

Specific cantonal aid:

Some cantons offer complementary programmes:

• Reduced-rate loans: direct financing on advantageous terms
• Subsidies for advice: partial coverage of due diligence or advisory fees
• Temporary tax exemptions: tax reductions in the first years

Regional economic promotion:

• Specific support for mountain or peripheral regions
• Sectoral programmes (innovation, industry, tourism)
• Job creation aid

Acquisition of businesses in difficulty:

• Specific schemes for acquiring businesses undergoing restructuring
• Enhanced support and facilitated conditions
• Objective of preserving employment

Important: Schemes vary considerably from one canton to another. Enquire with your canton's economic promotion service and consult Leez's partner experts to identify the aid you may be entitled to.

Comparative table of financing solutions

To help you quickly visualise the characteristics of each business acquisition financing solution, here is a summary comparative table:

Source	Typical share	Cost	Duration	Guarantees	Key advantage	Main disadvantage
Equity	20-40%	0% (opportunity cost)	-	None	Total autonomy	Limited liquidity
Bank credit	50-70%	3-6%	5-10 years	Mortgage, guarantee	Competitive rate	Personal guarantees
Vendor loan	10-30%	2-4%	3-7 years	Return clause	Flexible conditions	Strained relations if default
Mezzanine	10-25%	8-12%	5-7 years	Subordination	No personal guarantees	High cost
LBO	Complete structure	5-8% (weighted average)	5-7 years	Business assets	Maximum leverage	High debt
Private equity	20-40%	Capital dilution	5-7 years (exit)	None	Expertise + network	Partial loss of control

This table illustrates that there is no single ideal solution. Most successful acquisitions combine 2 to 3 sources to optimise cost, minimise risk and preserve the acquirer's autonomy.

Building your optimal financing plan

The success of your acquisition project rests on building a balanced financing plan, intelligently combining several sources to optimise cost, risk and autonomy.

Numerical example: acquisition of an SME for 2 million CHF

Here is a typical and balanced financing structure:

• Equity: 500,000 CHF (25%) - Acquirer's personal contribution
• Bank credit: 1,000,000 CHF (50%) - Credit at 4.5% over 7 years
• Vendor loan: 300,000 CHF (15%) - At 3% over 5 years
• Mezzanine: 200,000 CHF (10%) - At 10% over 6 years

Total annual cost:

• Bank credit: ~45,000 CHF interest in the first year
• Vendor loan: ~9,000 CHF interest
• Mezzanine: ~20,000 CHF interest
• Total: ~74,000 CHF annual financial charges

This structure presents a good balance: significant personal contribution (25%), reasonable bank debt (50%), vendor loan reassuring for the bank (15%), and limited mezzanine to bridge the gap (10%).

Key principles for building your plan:

• Maximise your contribution: each additional point improves your conditions
• Favour bank credit: it's the least expensive source after your equity
• Negotiate a vendor loan: positive signal and advantageous conditions
• Use mezzanine as a complement: only if necessary to complete financing
• Preserve your autonomy: limit capital dilution unless the expertise provided justifies it

Steps to obtain your financing

Here is the practical checklist to secure acquisition financing for your project:

1. Precise valuation of the target business (1-2 months)

• Obtain a professional valuation
• Analyse the last 3 balance sheets and profit and loss accounts
• Identify assets and liabilities
• Estimate working capital requirements

2. Preparation of documentation (2-4 weeks)

• Write a detailed business plan with forecasts over 3-5 years
• Prepare your CV and professional references
• Gather your personal financial documents
• Have a complete due diligence carried out
• Obtain a letter of intent from the seller

3. Approach several sources (1-2 months)

• Contact at least 3 banks to compare conditions
• Negotiate a vendor loan with the seller
• Explore cantonal guarantee organisations
• If necessary, approach mezzanine funds or investors

4. Negotiation of conditions (2-4 weeks)

• Compare offers received (rate, duration, guarantees)
• Negotiate conditions (amortisation deferral, covenants)
• Optimise the overall financing structure
• Have it validated by a financial expert

5. Finalisation and signature (2-4 weeks)

• Final validation by credit committees
• Drafting of loan contracts and guarantees
• Signature at the notary's
• Disbursement of funds

Realistic timeline: Allow 3 to 6 months between starting your procedures and actual fund disbursement. Anticipate these delays in your acquisition schedule.

Mistakes to avoid

Here are the most frequent pitfalls that compromise business acquisition financing projects:

1. Underestimating working capital needs

• Mistake: financing only the acquisition price
• Consequence: cash-flow difficulties from the first months
• Solution: plan for 3-6 months of additional working capital

2. Neglecting due diligence

• Mistake: relying solely on the seller's statements
• Consequence: discovery of hidden liabilities after acquisition
• Solution: invest 10-30K CHF in professional due diligence

3. Over-indebtedness

• Mistake: maximising leverage without safety margin
• Consequence: extreme vulnerability to economic uncertainties
• Solution: maintain a debt ratio < 3x EBITDA

4. Consulting only one bank

• Mistake: accepting the first offer without comparing
• Consequence: sub-optimal conditions (rate, guarantees)
• Solution: consult at least 3 institutions

5. Underestimating ancillary costs

• Mistake: forgetting notary, advice, due diligence, bank charges
• Consequence: lack of liquidity to finalise the operation
• Solution: plan for 5-10% of the acquisition price for costs

6. Not planning a safety margin

• Mistake: using 100% of your liquidity for personal contribution
• Consequence: no reserve for unforeseen events
• Solution: keep a reserve of 50-100K CHF after acquisition

7. Ignoring the importance of support

• Mistake: wanting to manage everything alone to save fees
• Consequence: costly mistakes, sub-optimal structuring
• Solution: surround yourself with experts (lawyer, tax specialist, financial adviser)

Avoiding these mistakes can make the difference between a successful acquisition and a costly failure. Do not hesitate to be supported by professionals specialising in business transfer.