As a small business owner, there occasionally comes a time when it makes sense for your company to merge, acquire another business, or buy out a current partner, also known as an acquisition, to expand your potential and/or reduce your costs for increased production.
However, you may be at your wits end about how to finance the purchase, in which case, the following list of top ways to finance a business acquisition can help.
Use Your Savings/Equity
If you are looking to purchase a small company, you can make the transaction using your own cash for less hassle, provided you have enough in your savings or retirement account to do so. Or you could also use your home equity or company equity if you’d like.
Apply for a Bank/SBA Loan
Buyers with a proven track record in the industry, along with substantial assets and a good personal credit rating, can also apply for a bank loan from a commercial bank to help finance their purchase.
Otherwise, if this is not your case, then you may consider applying for an SBA Loan instead, which rather than actually lends money, provides assurance to the bank that funds the acquisition. However, certain restrictions still apply, and you must also have a 10% down payment.
Negotiate Seller Financing/Debt Assumption
You can also negotiate with the seller to finance the purchase, in which case, if they agree, they will provide you with a loan that is to be repaid over time, typically from the business earnings.
However, unless you are a buyer with considerable assets and a sizeable down payment, they will typically only agree to finance about 30% to 60% of the negotiated sales price.
The seller will also want to see your business plan and experience, as well as your financial records, etc.
You can also work with the seller to assume their debt, which you can do by either purchasing their stock or assets. However, before acquiring a businesses’ liabilities, you will usually also need the approval of the debtors to do so.
Fund the Operations
After the business acquisition, you also need to ensure you have enough funds to keep it running successfully.
Therefore, keep this in mind when negotiating the purchase, which will enable you to obtain the proper funding.
You can also use a business line of credit to help finance the operations. However, in the end, it will typically take a variety of sources to keep it operating, depending on its size and more.
These are just a few top ways to finance the purchase of another business. However, there are also other types of business acquisition financing, which you should explore thoroughly to see which structure and requirements are most suitable for you.
You should also consider online lenders because, according to Lantern by SoFi, “even if you are applying for a traditional loan…online business acquisition lenders often have less stringent approval criteria than more traditional bank lenders. And they may offer more options, too.” They are also known to get your funds to you quicker.