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Almost everyone in their life gets an offer to buy an existing business, but many of us reject it due to a lack of funds and regret it later. But if you are aware of business acquisition financing, you won’t have to. It is a type of financing that can help business buyers own an established business with loyal customers and decent revenue. Whether you’re a first-time owner, an investor, or someone looking to expand the portfolio, acquisition financing can help in a buyout with no risk. Read the article till the end to learn about business acquisition financing in detail.
What Is Business Acquisition Financing?
Business acquisition financing is a shortcut for serious business buyers who want to acquire an already running business without making a hole in their own pockets. You don’t have to start a business from scratch, as it will take years to make it profitable. Instead, you can apply directly for a business acquisition loan.
Most of the first-time owners need it because they don’t have sufficient funds to cover the full purchase price. Investors use it to expand their portfolio. They are approved in particular situations, such as if you’re buying a franchise with a large clientele, merging with another company to grow market share, or owning a prosperous small business.
How Does Business Acquisition Financing Work?
Business acquisition financing has a simple process. It starts with finding the right business to buy. The next step is to review the financials. Lenders and buyers review revenue, operating costs, profit margins, and cash flow. A healthy business should be able to pay its bills and cover loan payments. If the numbers are not good, lenders will not move forward. Once the business ticks all boxes, buyers apply for financing.
After that, the buyer has to submit financial statements, tax returns, and a business plan explaining how the business will be operated after the purchase. At last, there’s approval and closing. After the lender approves the loan, funds are released to the borrower, contracts are signed, and ownership documents are exchanged.
Common Ways to Finance a Business Acquisition
There are many options to finance a business acquisition. Each type has different eligibility criteria, funding structures, loan amounts, etc. Below are the most common types of business acquisition loans:
- SBA Loans: SBA loans are partially backed loans by the U.S. Small Business Administration. There is very little risk for lenders in this. Plus, the down payments are less, repayment terms are long, and interest rates are fair.
- Bank Loans: These are conventional bank loans that require high credit and solid financials. Banks weigh several factors before approving the loan. Also, they have fixed terms and structured repayment plans.
- Private and Alternative Lenders: These lenders finance the acquisition faster than any other type. Most of the time, borrowers are those who do not fit traditional bank loans. The trade-off comes with high interest rates.
- Seller Financing: In this, the seller becomes the lender. The buyer has to pay a down payment and make monthly payments directly to the seller. These loans are negotiable, as there is no bank or third-party financial institution involved.
How Much of a Business Can Be Financed?
One of the first questions of a borrower to a lender is, “How much will I be financed?” The answer to this question can vary based on the lender type.
Typical down payment ranges
- Most lenders demand a 10% to 30% down payment of the sales price.
- It can be around 10%–15% in SBA loans.
- Traditional banks may ask for high interest rates if they think that the deal has risk.
When higher leverage may be possible
- The business has an excellent and consistent cash flow
- The seller agrees to seller financing
- The buyer has relevant industry or management experience
- The deal structure includes earn-outs or deferred payments
Factors that affect financing amounts
- Profit and debt coverage of the business
- Buyer’s credit score and liquidity
- Industry stability and market trends
- Purchase price vs. true business value
Business Acquisition Financing vs Traditional Business Loans
On paper, business acquisition financing and traditional business loans may look the same, but they are different. If you’re someone who is looking to buy a business, you have to understand the difference. It can save you time and money, and there will be no confusion during the purchase process. Here’s how they differ:
Purpose
- Acquisition financing: Used to buy an established business
- Traditional loans: Used for startups, expansion, equipment, or working capital
What lenders evaluate
- Acquisition financing: Existing cash flow, profit history, customer base
- Traditional loans: Future projections, business plans, and assumptions
Risk level
- Acquisition financing: Lower risk due to genuine financial data
- Traditional loans: Higher risk, especially for startups
Who Is Business Acquisition Financing Best For?
Business acquisition financing is designed for individuals and organizations who want to buy businesses fast and strategically. It’s quite useful for the following groups:
- First-time buyers: Buying your first business is not easy. But acquisition financing makes it easy by covering the capital you need upfront and after.
- Investors: For investors, cash is leverage because they invest in multiple businesses. Business acquisition financing helps them to acquire all of them with capital available for future deals or diversification. It’s a perfect way to grow a portfolio without losing cash.
- Owner-operators: If you plan to run the business day-to-day, this financing to buy a business helps you maintain working capital even after the purchase. This means you can cover payroll, marketing, expansions, or extra bills without any headache.
Key Factors Lenders Look At
When lenders review a business acquisition loan, they consider several aspects. Some of the key factors are:
- Cash flow of the business: Cash flow is paramount for a business loan. Lenders want proof that the business revenue can cover loan payments, operating costs, and other expenses. So, the cash flow should be high.
- Buyer experience: Experience matters. Buyers who have years of management, operational, or industry-related experience are believed to be ideal for a business loan.
- Industry risk: Some industries are more stable than others. Lenders prefer businesses in sectors that have constant demand, low risk, and long-term growth potential. However, riskier industries may still qualify, but only with strict terms and conditions.
- Deal structure: A well-structured deal is a signal of trust. If the purchase price is reasonable, lenders love to finance those deals.
In Short
So far, you’ve understood what a business acquisition is and how it works. All this information will make your business purchase a lot simpler than you think. Now all you have to do is find the right broker. Believe it or not, there is no one better than Yaw Capital. We are a U.S.-based financing intermediary and advisory firm that connects buyers with the right lenders and structures deals for them. Reach out to us, tell us about your deal, and we will make sure that you get the best possible business loan.
FAQs:
1. What is business acquisition financing?
Ans: Business acquisition financing is the financing that you use to buy an existing business that has dedicated customers, good revenue and systems. It helps buyers take ownership, grow the business fast, and reduce the financial burden from their shoulders.
2. How does acquisition financing work?
Ans: Lenders and investors fund the purchase using the business’s assets/shares or profit as collateral. Deals often combine loans, equity, or even seller payments to cover the price and working capital. Once approved, the funds are released, and the acquiring company repays from the business’s cash flow. T
3. Can I finance 100% of a business acquisition?
Ans: Yes, you can, but it’s not easy. Traditional lenders usually want you to put at least 10–30% in the deal. To get closer to full financing, buyers often combine seller financing, mezzanine debt, and loans secured by the business’s assets. However, the deal structure and working with the right advisors can make it possible.
4. Is acquisition financing different from a business loan?
Ans: Acquisition financing is different from a regular business loan because it’s to buy an existing business, not to just cover daily operations. Traditional loans consider your current business, while acquisition financing looks at the future of the business you’re buying.
5. How long does the financing process take?
Ans: It can take anywhere from a couple of hours with fast online lenders to several weeks with banks or SBA loans. Your timeline depends on the lender, loan type, and how quickly you provide complete documents.
