If you're not ready to buy an existing business outright, you have several funding alternatives, including business acquisition loans and seller financing. Depending on the asking price, you may combine two or more funding methods when buying a business. Each approach has pros and cons, so it's best to do your due diligence and work with trusted accountants, attorneys, and business brokers.
Fortunately, an established business typically has financial statements, tangible assets, and an existing customer base. Lending partners will consider these factors and more as part of their approval process. Here are four ways to purchase an existing company.
Securing business acquisition loans
A business acquisition loan can be through the Small Business Administration (SBA), credit unions, banks, or online lenders. These organizations may offer competitive interest rates for term loans or equipment financing. SBA loans are your best shot at getting a bank loan, but they require you to explore other options first.
Traditional bank loans often require good personal credit or a minimum credit score. Lending partners offer fixed and variable-rate loans, and some will require a personal guarantee. In addition to having substantial assets, NerdWallet said, "You must put down a 20% to 25% down payment on acquisition loans."
SBA loans include microloans, 504 loans, and 7(a) loans. Of these, the Small Business Administration said 7(a) loans are the most common. You can use it for "establishing a new business or assisting in the acquisition, operation or expansion of an existing business." SBA business acquisition loans require buyers to meet eligibility requirements and submit financial documents. Collateral policies differ based on the term loan type, SBA lenders, and funding amount.
Conventional, SBA, and online lenders typically instruct small business owners to submit financial documents for the existing company, including cash flow, operating expenses, and physical assets. You should work with the current owner to get business valuation details and financial statements. Lending partners may also request your personal assets, federal income tax returns, and personal credit score information.
[Read more: How to Get a Loan to Buy an Existing Business]
Conventional, SBA, and online lenders typically instruct small business owners to submit financial documents for the existing company, including cash flow, operating expenses, and physical assets. You should work with the current owner to get business valuation details and financial statements.
Buying an existing business with personal funds or family assistance
If you've been saving money for a new business or have a 401(k), you may use your savings to purchase an established business or as a downpayment for other financing options, like a small business loan. Doing so is a good way to avoid taking on too much debt. You have three choices with a 401(k), including withdrawing funds, taking out a loan against it, or transferring your balance into a ROBS (rollovers as business startups) account. According to LendingTree, "Entrepreneurs can use a ROBS to open a new business or purchase an existing business, including franchise locations."
However, the IRS warned, "Most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State." Another alternative is asking for money from friends and family. Clutch found that "22% of people who started a business relied on capital such as loans or investments from friends and family within the first three months."
Requesting seller financing
Seller financing is similar to business acquisition loans. The seller loans you a set amount, and you pay them back with interest. According to Guidant Financial, "Sellers usually offer between five and 60% of the total asking price." BizBuySell recommended that the current small business owner "enlist the assistance of a financial advisor or business broker and "ask for a sizeable down payment of a least a third up front." Additionally, Fundera suggested that "sellers require additional collateral, usually in the form of a personal guarantee."
[Read more: 10 Nonbank Lenders for Small Business Loans]
Attracting private equity or venture capital investors
Private equity and venture capital can help you purchase an existing business. Unlike most small business loans, investors don't require you to pay back the money. Instead, the SBA said, "Venture capital is normally offered in exchange for an ownership share and active role in the company." Investors can help you afford business acquisitions but may expect to give input on daily business operations. Moreover, they may want a say in future business acquisitions.
Similar to business loans, investors may check out various financial documents, including:
- Business valuation.
- Accounts receivable.
- Balance sheet.
- Business plan.
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.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
