Finance Your Business Acquisition
If you aren’t relying entirely on personal funds to buy a business, there are other ways to fund an acquisition, especially if you have good credit and have owned a successful business in the past. Here are several financing options.
Bank Loans
Like SBA loans, traditional bank loans come with a rigorous application process and usually require collateral. Maximum bank term loan amounts typically range from $100,000 to $3 million, and repayment terms often vary from one to seven years. The larger the loan, the more likely it’ll require a personal guarantee and lien. Additionally, banks tend to offer higher maximum loan amounts for secured loans versus unsecured loans.
Borrowers with good credit and available collateral can apply for a variety of SBA loans, which are partially guaranteed by the Small Business Administration, to cover up to 90% of the business purchase price. These types of loans have stringent requirements, the application and funding process can take up to three months, and the borrower is required to contribute a 10% equity injection, or down payment. Most SBA 7(a) loans, the most popular type of SBA loan, are distributed as term loans, and borrowers have up to 25 years to pay them back.
Online Business Loans
Loans from online lenders typically have more lenient requirements and quicker turnaround times than SBA and bank loans. However, the trade-off is usually higher interest rates and shorter repayment terms. Many online business loans come in the form of term loans or lines of credit. Depending on the lender and loan amount, borrowers could have anywhere from three months to seven years to pay it back in full, plus interest.
75 Lenders: Finance Business Acquisition
When it comes to financing a business acquisition, there are several top sources to consider. National Business Capital- is a powerful resource for business buyers and sellers to access a platform of more than lending partners. This program can help you find the financing that fits your needs, not just your budget. Other sources include business angels, who can provide not only capital but also valuable expertise and networks, and financial bootstrapping, which involves minimizing expenses and reinvesting profits to fund growth.
When it comes to financing a business acquisition, there are several top sources to consider. National Business Capital- is a powerful resource for business buyers and sellers to access a platform of more than lending partners. This program can help you find the financing that fits your needs, not just your budget. Other sources include business angels, who can provide not only capital but also valuable expertise and networks, and financial bootstrapping, which involves minimizing expenses and reinvesting profits to fund growth.
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Seller Financing
Instead of working with a bank, or in conjunction with it, entrepreneurs can approach a business’s owner and ask for seller financing. The seller usually loans from 5% to 25% of the buying price to the borrower, who agrees to pay it back over a period of time. This type of financing is more flexible than a traditional loan, and the borrower may be able to base repayment terms off the business’s success.
Debt Assumption
In this situation, the buyer takes on the business’s existing liabilities and debt, which are then subtracted from the business’s sale price. The lender of the debt has to be on board with this option, though, and it can complicate the purchase.
How To Do Business Acquisition Loans
Business acquisition loans are typically structured as term loans, in which you repay the borrowed funds, with interest, over a set period of time. Loan amounts, interest rates and repayment terms vary by lender.
Although you may ask for a specific loan amount, some lenders will offer you only a percentage of funding — and require that you supply the remaining percentage as a down payment. Down payments on business acquisition loans can be as little as 10% or as much as 30% or more depending on the type of financing, lender and your business’s qualifications.
Lenders typically rely on a business valuation — an evaluation of the economic value of the company you’re looking to buy — among other factors, when determining the loan amount to offer. Business assets, future earnings and current market value can be used to get a fair assessment of what the business is worth.
Collateral may also be required to secure your financing. In some cases, tangible assets from the company you’re looking to purchase can serve as collateral on the loan.
Business acquisition loan requirements
Like other types of financing, the business loan requirements for acquisition loans will vary depending on the lender. However, good personal and business credit scores, applicable business experience and a strong business plan can be helpful.
In addition to your own financial information, you’ll also be asked to provide information about the business you want to purchase.
Documents often required for a business acquisition loan:
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Letter of intent.
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Sales agreement.
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Franchise agreement, if applicable.
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Business financial statements.
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Business tax returns.
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Contracts and leases.
Dos And Don'ts Of Vendor Financing
Vendor financing is an attractive option for both buyers and sellers in the lower middle market. It involves the seller extending credit to the buyer to complete the purchase. The dos of vendor financing include negotiating favorable terms that benefit both parties and ensuring that the agreement is legally binding and transparent. The don'ts involve overlooking the default rates for seller financing in selling businesses, which can be a significant risk. It's crucial to conduct a thorough best step-by-step guide to checking the credit history of a buyer of your business to mitigate this risk.
Pros And Cons Of Earnouts
Earnouts can bridge the gap between the seller's expected price and the buyer's offer. They involve additional payments to the seller based on the business's performance post-acquisition. The pros are that they can facilitate deals and motivate sellers to ensure the business continues to perform well. The cons include the potential for disputes over performance targets and the complexity of structuring such agreements. It's essential to weigh these factors carefully before agreeing to an earnout arrangement.
Summary
In summary, financing a business acquisition requires a deep understanding of the various options available. From government subsidies and vendor financing to seller financing and earnouts, each method has its unique set of advantages and challenges. By considering these alternative financing options, entrepreneurs can find the right fit for their acquisition needs, ensuring a smoother transition and a stronger foundation for future success.
FAQ Section:
Q: What are the risks associated with seller financing?
A: The risks include the buyer's potential default, which is why understanding the default rates for seller financing in selling businesses is crucial. Additionally, there may be disagreements over the business's valuation and performance post-sale.
Q: How can government subsidies benefit a business acquisition?
A: Government subsidies can reduce the initial financial burden on the buyer, providing support through grants, tax incentives, or low-interest loans. This can free up capital for other critical areas of the business.
Q: What should be considered when looking into vendor financing?
A: It's important to negotiate terms that are favorable and manageable for both parties. Additionally, conducting a thorough credit check on the buyer and understanding the dos and don'ts of vendor financing for lower middle market businesses are essential steps to minimize risk.
