where to find financing
Buyers and sellers often question where the money may come from when making a business acquisition or merger. The following content is geared towards buyers, but sellers alike my benefit knowing what options may be available when negotiating purchase terms.
There are several lenders who specialize in business acquisition financing. You can view a list within our advisory network.
Like all financing, the applicant must prove their qualifications by completing the following:
- Do you have a strong credit management history:
lenders like to see that the applicant is responsible with their personal credit decisions. If your personal credit position is weak - meaning that you fail to meet credit obligations - you are likely to continue making poor credit decision in your business affairs. So the lender will disqualify you. See our credit management section on how to manage good personal credit.
- Do you have the business skills (character) to operate the business profitably:
lenders will likely request to view your resume and credentials. The question they will ask is weather you have the skill set to manage the business to profitability. Lenders are taking a great risk lending out the capital. They want to make sure you can properly manage the business so their investment may be returned.
- Do you have the capacity to repay the loan:
in other words, does the business that you will be acquiring has enough cash flow that allows you to operate the business, pay yourself a salary, repay the financing, and leave a cash amount as a cushion. Lenders will only approve up to an amount that meets these capacity requirements.
If the applicant meets these basic requirements, lenders will then extend funding based on the following terms (these terms may vary by lender):
- You will need to have down payment:
lenders will ask that you pay a portion of the acquisition price. This can vary by lenders. The down payment can range from 5% to 20% or higher - that depends on the lender and the type of business you may be requiring.
- Lenders may require some seller financing:
some lenders may ask the owner of the business to put down some seller financing. Again this can vary by lender and the type of acquisition. If the business has a solid cash flow position - and if the business can be easily transferable - then the lender may not require seller financing. See seller financing below.
- Lenders may approve the acquisition with some SBA financing:
the SBA (Small Business Administration) in conjunction with certain guidelines imposed on the lender will guarantee certain business loans. This guarantee mitigates some of the risk the lender assumes. Your lender may underwrite your loan request as a SBA loan.
Sometimes owners of the business will entertain seller financing as an option. Seller financing may be in addition to lender financing or it may be the only option if the owner and buyer can reach negotiable terms.
Every owner is different. But some owners may require that you supply credentials and personal guarantees that the seller financing will be repaid. These credentials may include the following:
- Do you operate a current business:
if you operate a current business that is profitable, the seller financing terms can be easily negotiable. The seller feels confident that you will be able to make the financing terms. The seller may also ask that your current company guarantees the loan.
If you are new to business ownership, the seller will likely require your current history in business, personal credit report, and other financial information to give them assurance that you can meet the financing obligations.
- Business references:
the seller will request that you supply business references from other businesses and individuals that you have worked with. They may also request a history of your business dealings.
- Ask for collateral:
sometimes owners may require some collateral guarantee. This is negotiable and can vary by owner. They run a big risk on whether you can take their company and keep it profitable. They may ask some for collateral to be placed in trust or escrow that can be tapped in the event the buyer fails to meet their financing obligations.
Another option that may be used instead of collateral is that the owner has some "stake" in the business that declines over time as the financing arrangements are made. In other words, the owner has rights to view the books upon request to see if the business operates significant cash to meet obligations. In the event the owner feels that your obligations will not be met, they can exercise their right to resume ownership. This is a something that requires extensive negotiations.
What's required in seller financing:
- Down Payment:
you will be asked to make a down payment. The down payment ranges from 10-20%.
- Financing Terms:
terms can vary and are negotiable. The rate is slightly above bank rates and the term can vary from 36-60 months. There is generally no prepayment penalties.
if seller financing in used in conjunction with lender and/or SBA financing, then the seller financing will be subordinated behind the lender financing. That is required by lenders and owners don't like this position. The owner assumes total risk if the buyer defaulted.
If subordination is required, the owner may request more buyer information (and collateral) to mitigate the risk. This varies by individual deal.
The Small Business Administration (SBA) provides financial assistance programs for small businesses that have been specifically designed to meet key financing needs, including debt financing, surety bonds, and equity financing. These loans are provided by lenders who follow SBA guidelines. The SBA will guarantee these loans thus mitigating the risk to the lender.
SBA guidelines can vary by region, demographic, and business type. We invite you to visit the SBA web site for more information.
What's required for SBA financing: (these requirements can vary)
- Personal Background:
you will need to provide personal background information, previous addresses, resume and employment history, experience, educational background, etc.
- Business Plan:
to include a complete set of projected financial statements include forecast, profit and lose, balance sheet and cash flow position.
- Business Documents:
this will include your business plan, legal documents and/or agreements, business licenses and registrations, and other.
- Personal Credit Report:
personal credit background and history. See our personal credit management file.
- Tax Reports and Financial Information:
your personal and business tax filing, bank account information, bank statements, your personal financial statement with asset holdings, etc.
- Collateral Requirements:
may or may not be required depending on the business plan and current business cash position. The stronger the cash position of the company you will be acquiring, the less need of collateral to secure the loan.
Check with the SBA (and your lender) for detail application requirements: SBA.gov
Personal financing options include using your investments or the equity in your home to collateralize loans and/or use to cover the down payment and part of the acquisition costs.
Using your personal assets put you at risk. But if you feel the business opportunity is worth the reward/risk ratio, then personal financing may be a viable option. Using personal financing allow cash to remain with the business to be used to fund operations and marketing moves.
You can view our home equity center for more information regarding home equity financing for business.