Buying a business
Financing options are different when you're buying an existing business. — Getty Images/Jirapong Manustrong

There are many benefits to buying an existing business. You’ll already have an established customer base, knowledgeable employees and reliable cash flow.

Each of these perks will help you obtain a loan to finance the purchase; but doing so is no easy feat. Before you try to secure loans or funding, you’ll want to do your research. Here’s everything you need to know about financing your business acquisition.

Ways to finance buying an existing business

Financing the purchase of an existing business is different from financing a new business. Because an existing business already has a track record of success, it’s often easier to get funding for this type of investment than for a brand-new startup.

According to Commercial Capital, there are a few different ways you can finance your purchase. However, keep in mind that many of these are used in collaboration with others.

  • Personal funds: If you have a ton of money saved up, perhaps in preparation for this type of transaction, then you should consider digging into your savings. However, this arrangement might require additional support, like from that of a bank or SBA loan.
  • Seller financing: Often, the person selling you their business will loan you money that you can pay back over time, typically using the profits you make off the business. This helps ease the transition without draining your bank account.
  • Bank loan: Traditional bank loans can be hard to attain, especially for a business acquisition. Unless the existing company has substantial assets, and you have a great credit score and track record, you likely won’t score this financing on your own.
  • SBA loan: This is your best shot at getting a bank loan. An SBA 7A loan “provides guarantees and safety measures for banks who, in turn, can lend money to fund acquisitions,” writes Commercial Capital. The guidelines are typically minimal, though the bank can add its own.
  • Leveraged buyout: Ultimately, this involves leveraging some of the business’s assets to help fund the acquisition. This is rarely the only form of funding, however, and often involves loans or seller financing in addition.
  • Assumption of debt: With this financing option, you essentially purchase both the business’s assets and liabilities. In other words, you might assume existing debt. To do so, you often need the approval of debtors.

To determine which method is right for you, you’ll want to consider how much you’re willing to both invest and risk, and what makes most sense for you and your acquired business. If the company has a decent track record and you have an impressive credit history, for instance, you might apply for a bank or SBA loan. On the other hand, someone lacking in those areas might find seller financing as a more realistic path. Regardless, you can always consider alternative options if your original one falls through.

[For more on loans, see How to Prepare for a Business Loan.]

You’ll also want to prepare for any additional expenses, like closing and operational costs. Do some research and discuss your options with professionals before committing to a specific funding resource.

Business owners often struggle to secure loans for business acquisitions because much of the company’s financial history is out of their hands.

What lenders consider

If you choose to take the lender route, which many do, you’ll want to be prepared with the right information to sell your case. Fundera says a potential lender will want to see the following:

Personal finances:

  • Personal credit score
  • Business credit score (if you already own a business)
  • Tax returns
  • Cash flow statement
  • Outstanding debts

Finances of acquired business:

  • Balance sheet
  • Business tax returns
  • Profit margin

Business owners often struggle to secure loans for business acquisitions because much of the company’s financial history is out of their hands. Any red flags from before the acquisition can prevent them from attaining a loan. That, coupled with any personal finance issues, makes it especially difficult to receive the proper funding.

However, it’s certainly not impossible, and it helps to provide a decent down payment. In fact, Lendido says there are traditional lenders who prefer to finance small business owners who are purchasing an existing business — provided they’re willing to put down somewhere between 20 and 50%.

Applying for a business loan

You don’t want to approach the application process empty-handed. Before applying, Fundera recommends preparing documents and details that prove you can be trusted. This includes:

  • Business valuation
  • Related experience
  • Business plan
  • Future projections
  • Value add

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published February 25, 2019