If your firm is seeking out an acquisition soon, there’s more than one way to finance a small business acquisition than only using company funds. There are several options depending on your enterprise and the corporation being acquired.
Finance For Small Business Acquisition
Personal: One of the simplest ways to finance a small business acquisition is to use your cash. This can be your own funds, for example, your savings. While this is a simple method, it is unlikely you’ll use and risk all your personal funds, and instead combine some of your own funds with other financings to allow for a larger purchase or better deal.
Business: If your business is fortunate to hold enough cash, it may be possible to purchase using 100% of the company’s funds. However, this is exceedingly rare, especially with so many other financing options available that provide better protection. Using business cash reserves can be made easier by freeing up cash flow, for example, by paying suppliers on net 30 or 60-day terms.
Don’t forget that you’ll likely need some liquid funds during the post-merger integration.
Most banks have facilities available for handling business acquisitions. The bank will analyze your records and the finances of the company you want to acquire.
Banks tend to lend against business assets and not business plans, making financing a business acquisition using a term loan rather difficult unless your company has substantial assets and good credit.
With historically low-interest rates, now should be an excellent time to take advantage of this option. If you choose a bank loan, be sure to shop around, though your bank is more likely to support you and provide you the best terms in the hope of keeping your expanding business in house.
A few banks offer online loan applications; however, most banks still require a traditional, in-person application. Also bear in mind that a local community bank or credit union may be more likely to approve you than a large, nationwide banking institution, depending on how established your business is.
SBA loans are bank loans that are backed and guaranteed by the US Small Business Association. They don’t lend money but instead provide safety measures for banks who can lend money to fund acquisitions.
Because there is less risk for the bank, they can offer lower interest rates and better repayment terms, typically 8-10% for loans over $50,000. Repayment can be extended for up to 10 years, allowing for extra cash flow in the business.
Lenders have distinctive eligibility requirements and also the freedom to add the SBA qualification guidelines as they see fit.
Although the application process is straightforward, there is a long checklist of items you’ll need to handle. In general, eligibility is based on what a business does to receive its income, the integrity of its ownership, and where the company operates.
To qualify, potential borrowers must:
- Be able to put 20% down (acquisition between $150,000 and $5 million)
- Have adequate credit
- Provide three years of tax data
- Provide personal financial info
- Evidence they have good experience in the industry
This relatively new form of funding has become popular for start-ups in recent years. Although you may not get the full funds you require to finance a small business acquisition, it’s a good option to get partial funding.
There are different options, such as rewards-based and equity-based crowdfunding. This could suit your business if you have some kind of product or service that can reward your backers, or the acquisition will increase your company’s net worth, which can be shared in the form of equity.
Peer-to-Peer Business Lending
Like crowdfunding, this method allows you to borrow from multiple interested investors in an online marketplace or even local interested businesses. Having a strong online presence and community-minded business plan will help you convince potential funders to invest in your acquisition.
Leveraged buyouts (LBOs) let buyers capitalize on their returns by reducing the cash they invest, making this method a good option to finance a small business acquisition. Becoming popular in the 1980s, LBOs leverage debt on the assets of the company being bought. However, this makes for high risk – high reward strategy as leverage can also maximize losses and have a sizable negative effect on your return rate.
Like a leveraged buyout, this funding method uses the value generated by the target business to acquire it – essentially getting the financing on the value of the acquired business assets, not their liabilities. In the worst-case scenario, the loan is made on the basis that the assets can be liquidated.
Issuing bonds is an excellent way to finance a small business acquisition. A relationship serves as a loan between the investor and your business. The financier agrees to give the business a specific amount of money for a specified period. In exchange, the funder receives regular interest payments.
Although more complicated than a bank loan or an SBA loan, and vary from state to state, issuing bonds makes you think about how you’ll pay off the debt in installments over a given period.
If the target business is interested in maintaining some control, then giving away equity in the newly merged firm could be a good option for raising funds, or paying less money for the acquisition. The added bonus is getting the seller’s insight and expertise.
Multiple Source Funding
Typically, most purchases are structured using one or more funding methods. For example, a $10M deal acquisition could look like:
$2,000,000 from business cash reserves
$3,000,000 from issuing bonds
$5,000,000 from SBA loan
If you’re considering acquiring a new business, check out all the various financing forms, and seek support from your professional financial advisor. There are also loan matching services and brokers who can help you explore options without having to look at individual sources.
It could take some time to get your existing business records in order and go through the funding application process. The longer you can give yourself, the more options you’ll have to get the best funding that’s right for you.
What other tips do you have to finance a small business acquisition?
If you’ve been through this process, how easy was it for you? Let us know in the comments section below.