Equity is what's left when you subtract all of a business's debts from its total assets. Say a small bakery owns an oven, shop fittings and a little cash worth 120,000 euros, and owes 40,000 euros in loans. Its equity is then 80,000 euros. That part truly belongs to the owner, and nobody can reclaim it.
There are two ways to look at equity, and both are worth knowing. The first is about the business itself. Solid equity acts like a cushion for tough times: if one month runs weak or a machine needs replacing, the business absorbs it on its own instead of running to the bank. Anyone buying a business looks closely at how much equity is inside, since it's often a good sign of stability and ties in with the asset value.
The second view concerns you as a buyer during the purchase itself. Here equity means the money you bring from your own pocket, savings for example, rather than borrowing it. If a business costs 200,000 euros and you put in 50,000 euros yourself, that's your equity. The rest is covered by the acquisition financing.
Banks almost always expect a certain share of equity when financing, often roughly between 10 and 30 percent of the purchase price. The reason is simple: someone who puts in their own money shares the risk, and that lowers the risk for the bank. Without any equity, financing gets hard, because the bank would have to carry the whole gamble alone.
If your equity is tight, there are ways to close the gap. A seller loan defers part of the purchase price. A guarantee gives the bank extra security. And a subsidised loan brings in low-interest capital. For small businesses in particular, this makes takeovers work that look impossible at first glance.
For business sellers
As a seller, healthy equity inside your business is a real selling point. It shows your business stands on solid ground and has reserves. Buyers and banks like to see this, because it makes the later acquisition financing easier.
It also helps to know how much equity your buyer is likely to bring. If they fall short, you can bridge the gap with a seller loan and make your sale possible in the first place.
For corporate buyers
As a buyer, be honest early on about how much equity you can really contribute: savings you can spare without leaving yourself exposed. That figure decides which businesses are realistic for you and how much you'll rely on acquisition financing.
If your equity is tight, don't give up. A seller loan, a guarantee or a subsidised loan can cover the missing part. Many small takeovers succeed on exactly this kind of combination.
Example
Anna wants to take over her neighbour's little sewing studio for 90,000 euros. She has 20,000 euros saved, that's her equity, around 22 percent of the price. The bank then finances the remaining 70,000 euros, because Anna's own stake gives it enough security.
FAQ
What is equity in plain words?
Equity is what a business truly owns after all debts are subtracted, assets minus liabilities. When buying, it also means the money you bring in yourself instead of borrowing it. It's closely related to the asset value.
How much equity do I need for a takeover?
Banks usually expect roughly between 10 and 30 percent of the purchase price as equity. For a business costing 150,000 euros, that's about 15,000 to 45,000 euros. The rest is covered by the acquisition financing.
What do I do if I'm short on equity?
There are ways to close the gap: a seller loan, where the seller defers part of the price, a guarantee as extra security for the bank, or a low-interest subsidised loan. Often financing can still be arranged this way.
Why do banks want to see equity at all?
Because with your own money in the deal, you share the risk. That lowers the risk for the bank and shows you're serious. Without any equity, the bank would have to carry the whole gamble alone, and few are willing to do that.
Is buying rather than starting worth it if I have little equity?
Often yes. An existing business comes with customers, fittings and ongoing income, which gives banks more security than a start-up with nothing to show. If your equity doesn't quite stretch, a seller loan or a subsidised loan can close the gap. Buying is often easier to finance than starting from zero.
Is equity the same as the purchase price?
No. The purchase price is the whole amount for the business; your equity is only the part you bring yourself. If the price is 100,000 euros and you put in 25,000 euros, that's your equity. The remaining 75,000 euros come from the acquisition financing.
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