Business Acquisition Financing 101: Get Funding to Purchase a Business

Amazon Business Credit
Amazon Business Credit: What It Is & How It Works
July 5, 2018
moving abroad with credit card debt
Moving Abroad with Credit Card Debt
August 9, 2018

Acquisition financing is the process during which a business investor secures the necessary capital to meet their objective of buying a business or expanding an existing business. Business acquisition funds create opportunities to – Purchase an established business, Negotiate a partner buy-out in an existing business, or Expand business opportunities by obtaining another franchise location, among others. The art of acquiring an interest in an existing business is often considered a less costly proposition than the expenses required to get an idea off the ground.

How Do Lenders Evaluate Potential Business Acquisition Candidates?

Business acquisition lenders really just offer business credit. Like any investor, in order to be successful acquisition lenders must adhere to their own investment objectives.  As such, business acquisition lenders evaluates the viability of each candidate. Their analysis is done with extreme diligence. The lenders begin by carefully reviewing the applicant’s well-drafted business plan.

A business acquisition financing applicant also shares their assessment of the value of the business that interests them. A candidate’s evaluation should breakdown cash flow and analyze relevant economic data regarding the business acquisition opportunity. In fact, the simplest way to give the credit decision-maker an accurate snapshot of the target business is to provide complete bank statements and financials for the past 3-5 years.

While a business financials play a starring role in the candidate’s approval process, the applicant should make sure to disclose their business industry experience, prior successes and exceptional talents as evidence of a smooth transition after acquiring the business. Finally, it is important to place a value on the business’ tangible assets – like inventory, equipment, real estate, etc. and, the intangible assets like reputation and goodwill.

As an applicant, it might seem a bit unnerving awaiting the bank’s review of the target business’ financials, but, the reality is, it is really just a free 2nd opinion from the bank’s team of financial evaluators. While a denial may sting at first, the bank’s less-than-positive opinion might have unknowingly prevented serious future business problems for the applicant.

The Different Types of Business Acquisition Financing

The U.S. Small Business Association – SBA

The SBA’s mission is to facilitate the development of small businesses across the country. Although, the SBA offers assistance in many ways, one of their primary methods is to guarantee business acquisition loans originated through pre-approved lending partner-banks. The SBA, and the Veteran’s Administration, guarantee a portion of the business acquisition loan by requiring lending partners to comply with SBA guidelines if the lender wants their loan guaranteed. Essentially, SBA’s guarantee is a safety net for business acquisition lenders.

The type of business acquisition financing one might qualify for is contingent upon the size and nature of the business. The Small Business Administration is known for setting more appealing guidelines which ultimately makes SBA loans more affordable. This is accomplished by extending the payment terms and requiring a smaller down payment. These less restrictive requirements enable businesses to retain cash,  and to focus on operations and debt reduction. The SBA offers financing as follows:

  • A minimum down payment of 10%
  • 25 year repayment schedule
  • The choice between adjustable and fixed rate loan options
  • Maximum loan amounts that exceed eleven million dollars
  • SBA loans do not include balloon payment loan options
  • SBA guides are designed in a way that most for-profit small businesses to comply with mandatory requirements

Additionally, the SBA guidelines have certain limits regarding averaged net income as well as net worth. The SBA’s application requires the submission of personal financial statements, accounts receivables, business tax information, a business’ financial statements, and often, the corporate charter.

Other Business Acquisition Financing Options

Friends and Family

When your business objective is in its infancy, most investors seek guidance and potential financing from family or friends.  Additionally, Angel Investors, like local business leaders, often invest in small businesses as a way to pay their success forward.

Often, family and friends contribute towards the down payment needed to secure the financing. And while, the SBA allows for a 10% down payment, conventional financiers require larger down payments. For business acquisitions that carry an unusually large risk factor, this down payment can reach upwards of 50%.

Seller’s Financing

Sellers, when itching to sell, are often willing to assist by funding the acquisition themselves. The structure of a seller’s financed acquisition is similar to a lender as it too requires a down payment and a mutually agreed upon installment payout plan. Those especially motivated to seller, usually offer attractive terms to fund the acquisition.

Financial Institutions

The financial meltdown that began around 2008, prompted an overall credit-tightening across financial markets. However, business acquisition loan qualifications were, and have always been stringent in the face of risk they bring. Banks, who participate in the business acquisition lending marketplace require managerial experience and/ or a relevant expertise. Financial institutions have also created business acquisition financing programs to facilitate business ownership for minorities, women and disabled veterans.

As you research your business acquisition financing options, stay prepared and informed.  It is not unusual, especially in stricter credit markets, for business owners to investigate several lending sources simultaneously.

Business Acquisition Factors to Consider

As one would expect, business models vary from one business to the next. Yet, despite the noted variances, there are three consistent factors to consider. First, it is critical to Quantify the business investment. This is done by honestly evaluating your own personal financial heath. Are you financial secure enough to invest in this business? Have you decided how much you are willing to spend?

Then, compare your skill level and business experience with the task at hand. Can you reasonably manage and profit from this investment?

Finally, take a step back and realistically (as in No Holds Bar), assess the business opportunity. Comprehensively review the nitty-gritty of the business’ financials. Ask a professional to assist you in understanding  the cash flow, the inventory, the contracts, the existing leases and infrastructure. The more you can learn about the business, the more likely you will make a well-defined and informed financial decision.

If a business acquisition opportunity crosses your path, be prudent and take a moment to evaluate the opportunity. Then, decide whether or not the business opportunity fits your business and financial objectives. Golden tickets don’t come along often, but they can be found by the vigilant investor.