How to Finance a Business Acquisition
Business experts often say that it costs less to buy an existing business than to build one from the ground up. If you are an entrepreneur looking into purchasing a business, there are a few items to consider when seeking financing for the acquisition that may strengthen your viability as a loan candidate and your ability to tap into a variety of potential financing sources.
Most lenders will want to review your business plan, and you should also determine the economic status and value of the business you're considering buying. Review the financials and consider having your banker and/or trusted financial advisor also review the numbers. Ascertain the value of the business, including any equipment, real estate, inventory and other assets.
To increase your viability as a loan candidate, convey your industry expertise and any management know-how to your potential lender. Lenders look for candidates who exhibit strong potential for success after acquiring the business. Show lenders that the transition period will run smoothly, and consider keeping existing managers on staff to help ensure an easy transition. Seasoned employees can also help you learn the inner workings of the business and help secure extended contracts with existing customers.
When seeking financing, consider these lending sources:
- Family, friends or "angel" investors. Lenders will likely expect the buyer to provide between 20 percent and 50 percent of the capital upfront. If you do not have the initial capital to invest in the business, consider borrowing from family and/or friends. Another option may be "angel" investors--wealthy individuals who make equity investments in businesses at the early stages. They typically have expertise in the fields of businesses in which they invest and can also offer their resources and contacts.
- Seller financing. Consider asking the seller if he or she can provide financing for the sale of all or some of the business. In some cases, sellers may provide a very reasonable interest rate. Some seller financing can also prompt other lenders to invest in the venture.
- U. S. Small Business Administration. Many lenders across the country offer small-business loans guaranteed by the U.S. Small Business Administration (SBA). These loans may provide more lenient and flexible financing for qualifying borrowers.
- Financial institutions. While the industry is still in the midst of a tight credit market, the fundamentals for loan qualification remain important. They include demonstrating positive cash flow, solid management experience, industry expertise and a strong credit report. Banking relationships are also a significant part of the equation. It is important to cultivate and maintain a relationship with your banker, keeping him/her well-informed about your business experience within a particular industry. Many banks, also have special lending programs for women-, minority- and disabled-veteran-owned businesses.
Be prepared and stay informed when seeking financing for an acquisition. It is not unusual, especially in a tight credit market, for business owners to seek a variety of lending sources.
The foregoing article is intended to provide general information about financing an acquisition and is not considered financial advice from Union Bank. Please consult your financial advisor.