Starting a business from scratch is very complicated. That is the reason many aspiring entrepreneurs are inclining towards buying existing and accomplished businesses. What are the advantages of choosing to buy an existing business? An established customer base, recruited staff, and reliable revenue and cash flow are few benefits of buying an accomplished business.
Buying an existing business is not entirely easy. From scouting for a suitable purchase option to closing the deal, a lot of work goes into acquiring or buying an established business. One of the most important steps in this business transaction is to secure funding or capital. What are the available options to finance or fund this business transaction? The experts at Bowarr Management LTD have outlined the most popular and practical ways of funding your business acquisition. Here’s everything that you need to know about.
Ways To Finance A Business Acquisition
Personal or Family Money
This is often the first source that anyone would go to. If you or your family can cover the expenses of the business acquisition, then it is a very secure and viable option. Also, it’s a practical step if you are considering buying a small business instead of a big chain.
However, there are certain things to remember before bringing in your own money. What is that? Consult with an accountant. Also, ensure that you aren’t outing all of your money into buying the business because you will require a certain amount of capital also. You can also decide to use the money borrowed from family members or relatives. In that case, there might be tax implications.
Some sellers will also agree to provide finance or loans. They agree to give a note or accept staggered payments. They do it to ensure that they obtain continuous assured income for a certain period.
Depending on the local laws, there are rules concerning seller financing, especially if you wish to opt for another method of financing as well. Some sellers also agree to trade certain assets of the business for a lower price.
This is a quite popular method to bring in financing for a business acquisition. Instead of buying the business solo, one can choose to be the owner of the company while also dividing the payments with a partner. Bringing a partner onboard has another set of advantages, too, besides the financial ones. When you make someone with specific expertise your partner, it will be a valuable addition to the company as well. Be careful not to skip the partnership agreement because it may bring ownership issues in the future.
Selling Stocks to the employees
This is another method to finance the business acquisition. When you sell some stock to the employees, you can get a huge discount. You can make up for 50% or even 90% of the business price. However, you should keep hold of the controlling stock because you need it to retain ownership of the business. Additionally, you have to restructure the company into an S or C Corporation to issue the stock.
Lease the business
You can choose to lease the business than buy it entirely at first. You can purchase it as time goes by, and you can afford it. However, the catch is that not all sellers will be willing to do this as they want to dust their hands and be done with the business. But, if leasing seems a more viable option for you despite being costlier in the future, you can ask your seller or find someone willing to go with this option.
Debts from banks and other financers are the most preferred method to acquire capital for business acquisition. You will have tons of documents and data to show to banks or other financers while approaching them for debts. They include financial histories, inventory, cash flow statements, valuations, and more. Data will make you a suitable candidate for debt because most financiers and banks do not prefer to offer debts for a clean slate.
Financing Options If You Are Looking For A Small Business Loan
If all you need is a small business loan, then here are some practical go-to options to help you buy the business:
You can take a term loan which you can repay in some certain set periods. Term loans usually last between one to ten years. It depends on the amount of money that is being lent. If it is a rather big amount, then it can also last up to 30 years. A term loan usually has a fixed or floating interest rate. This also depends upon the lender or the financier, and the amount of money that is involved.
Getting asset-based financing for a business acquisition is quite easier because it consists of a lot of accurate and proven data along with reliable history. Before lenders approve of asset-based financing, there are a lot of factors and essentials that they consider. Some of them are given below:
- The personal credit score of the borrower
- The credit score of the concerned business
- Annual revenue of the business
- The existing and the predicted cash flow
- The time since the business has been in operation
- Tax returns of the company
- Balance sheets
- Outstanding debts
Often for term loans and Small Business Loans, the buyer has to put in some amount as the down payment. It is generally an amount that is 20-25% of the acquisition loan. For Small Business Loan, there has been a modification concerning the down payment. According to the updated requirements, buyers have to put in a down payment of 10% of the acquisition price. 5% of that can come from the buyer, and the remaining can be in the form of a seller’s note. However, the seller should agree to be on ‘standby’, meaning that he will not be repaid until the bank is paid.
Some Requirements When You Seek Financing
Finance is not something that is easily obtained. Despite buying an established business that has a reputable history and proven track record, you as a buyer should possess certain essentials which will increase the probability of obtaining finance. What is that? Consider the following:
- An updated business plan developed by experts
- Accurate financial projects of the business when you will have ownership
- Business valuation
- Your experience
- Value addition that you bring to the table
You should be able to convincingly deliver your story of how there will be significant improvement and growth in the business once you take over.
In A Nutshell
You do not want to return empty-handed when you approach for finance. Having a lender’s perspective can also help you while trying to gather capital for your business acquisition. Formulate the value of the business that you wish to purchase or acquire and map out how you plan on making it grow in the future. Also, outline the past wins and losses of the business to make the financiers understand the viability of your business more clearly. How can you gather all that information- including the risks and highlights of the business? Due diligence is what will help. Due diligence will aid in understanding the business that you wish to buy and will provide you will every detail. Such information can help you to have an upper hand while convincing financiers or banks for capital.
Bowarr Management DIFC has remarkable expertise and long-term experience to look beyond the numbers. This, combined with our extensive knowledge about a wide array of industries, ensures that we have all the answers to all your financing questions. We provide premium Due Diligence services and will ensure that you have adequate information to put you on the positive side of gathering capital. Get in touch with our professionals soon.