Women In Business

Creative ways finance the purchase of an existing business

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A large number of people are interested in trying their hand at business ownership, but don’t exactly want to build something from the ground up. Today’s cutthroat economy makes it much more difficult to fund and operate a new business ⎼ making acquiring an existing one a highly attractive option for entrepreneurs.

Purchasing an existing business has its perks, like stable cash flow, customer base and set of employees. Oftentimes, it is also easier to obtain funding to acquire a company that’s already up and running. In this article, we will cover the various options available to you for financing the acquisition of an existing business so that you are well-educated and can decide what will work best for you.

Options for Financing Your Acquisition

Use your own money

While it’s unlikely that you will use this option to meet the entire purchase price of the business you’re buying, it is definitely important to come to the table with some money of your own. You may have been preparing for this moment for quite some time and have lots saved up for the occasion. Or you may intend on using your retirement funds, home equity, or other savings. However, it is likely that you will still need to use a secondary form of financing to purchase an existing business.

Seller financing

Depending on your relationship with the seller, he or she may be willing to provide financing. Essentially, the seller will loan you money that can be paid back over time ⎼ typically with incoming revenue from your new business. This is a more flexible and simple option compared to traditional financing. This method of financing will likely require you to provide detailed information to the seller about your plans for the business, as well as your financial background. And again, it is uncommon for sellers to finance the entire sale price.

Get a bank loan

Bank loans are what most would consider “traditional” financing to help you acquire an existing business. Traditional, yes, but certainly not easy. To obtain funds through a commercial bank loan, you must be able to show a healthy credit history, a good bit of assets, and time in the industry. You cannot simply go in and show them your business plan and hope to get the financing needed to secure your new business. Do not exclude getting a bank loan as an option to obtain funding, though. If you are concerned about meeting these stringent requirements, you may have better luck with a loan guaranteed by the Small Business Administration (SBA).

SBA loan

An SBA loan, in and of itself, is not actually a loan from the Small Business Administration. Rather, the SBA guarantees the loan and implements safety measures for the bank issuing the funds. You will face less strict guidelines and can receive up to about $5 million towards your acquisition. If you think an SBA loan may be a good option for you, as it is for many, be prepared to hand over a few years worth of tax filings and financial information, as well as be able to speak to your experience in the industry and have some established credit history. It is typical for entrepreneurs to pair an SBA loan with either their own funds or a percentage of seller financing.

Leveraged buyout

A leveraged buyout can be an extremely beneficial way of funding your purchase. In this option, you leverage the existing assets of the business (machinery or other equipment, real estate, inventory, etc.) as a way to finance the acquisition. This method also pairs well with either an SBA loan or seller financing but has one major disadvantage. Obviously, you want everything to go according to plan. However, if your new-to-you business venture goes awry, the leveraged buyout option can greatly maximize your losses and rate of return.

Assumption of debt

A less used and more complicated option for acquiring an existing business is to assume the debt. In other words, you would assume the debt of the existing business, whether it be through buying the company’s assets or its stock. It’s important to know that if you purchase the assets, you assume less liability than if you purchase the stocks. Also, be aware that a portion of your payment to the seller will essentially be going toward pre-existing business debt.

Choosing the option that’s best for you

If it isn’t apparent already, it is likely (depending on your own unique situation) that you will need to utilize two of the aforementioned methods to finance the purchase of an existing business. Some feel safer with requesting seller financing and an SBA loan, while others may opt for the riskier route of leveraging company assets or assuming old debt. It is up to you to choose the option that works best for you and for your new-to-you business.

When making this decision, keep in mind that financing the purchase of an existing business is only half of the job ahead. You will also need to forge a plan to finance future operations (cash flow and inventory) while being able to pay back the money being borrowed.

About Marsha Kelly

Marsha Kelly sold her first business for more than a million dollars. She has shared hard-won experiences as a successful serial entrepreneur on her blog at Best4Businesses.com, where she also regularly posts business tips, ideas, and suggestions, as well as product reviews, for business readers. As a serial entrepreneur who has done “time” in corporate America, Marsha has learned what products and services really work well in business today. You can learn from her experiences to build your best business.

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