Business Acquisition Financing
In this article, we are going to focus on business acquisition financing and how you can use the proceeds to acquire an already existing and profitable business. In many instances, the risks that are associated with buying an already established company are substantially lower than those of starting a company from scratch. This is primarily due to the fact that someone else is already put in the necessary time and effort to launch business operations, generate a customer base, then developed a proven track record for the company. As such, he can expect to pay a premium for the business when you’re searching for business acquisition financing. With the benefits of using business acquisition financing is that many banks and financial institutions view this type of funding as less risky than other types of new business startup funding. As such, and as you progress to your operations of receiving business acquisition financing, you’ll find that many financial institutions are far more susceptible to providing your business with the funding you need to acquire the target company that you found.
When you are seeking business acquisition financing, you’ll need to have a substantial amount of documentation in place. This documentation can be even more expensive than if you were starting up from scratch. This is primarily due to the fact that you’ll need to have three years of Returns from the business that you are purchasing. Prior to acquiring any type of existing business, a certified public accountant should overview the income tax statement of the business to make sure that all income is being appropriately reported to federal and state agencies. Additionally, by reviewing the tax returns of the target acquisition company then sure that the income that is being produced by the business to sustain the debt obligation is undertaken in order to buy the company. Also, when seeking business acquisition financing, you should thoroughly make sure that there are no outstanding liabilities that will add to the debt that you intend to undertake one acquiring this business venture. This process, reviewing all the documentation provided to you by the business owner or their business broker, is commonly referred to as due diligence. Any entrepreneur that continually acquires existing businesses, should always go through a substantial due diligence prior to purchasing any company. This is especially true if you are seeking business acquisition financing.
The other benefits of using business acquisition financing, you will greatly enhance the return on your investment as you acquiring the business. Of course, much of our discussions pertaining to the down payment that is required for a new start up you can also be sure that you will be required to put up 10% to 20% of the total amount of the transaction in order to acquire the business that you have found. However, the return on your investment that you receive from ongoing operations and business may be substantial and typically much higher than you’d ever received by investing your money in the stock market, mutual funds, or other types of common investments. Of course, the risks associated with operating and business venture also substantially higher than buying shares of a well-known and highly established company. As such, the return on investment that you receive by purchasing a business to business acquisition financing is very high simply due to the fact that the risks are substantially higher than investing in traditional asset classes. For instance, let’s assume that you find a company that is generating $200,000 a year of net profit and is being sold for $1 million. If you’ve got the requisite 20% down payment, or $200,000, plus $800 hundred thousand dollars in order to complete the purchase of the business then you will earn approximately $200,000 per year on your $200,000 investment minus the interest costs associated with the loan. As a quick calculation, the interest that you pay on $800,000 business acquisition financing loan would be approximately $60,000 per year. Of course, as you continue to make loan payments against the business acquisition financing that you undertook you also build a substantial amount of equity into the business.
One of the things that many entrepreneurs do not focus on what they’re developing their businesses ultimately be sales price of the company. We are going to thoroughly discuss this in several of our future articles as it pertains to building wealth for the development of new businesses. However, in regards to this specific conversation as it relates to business acquisition financing, we will continue to focus on the issues pertaining to the price-to-earnings multiple as a function of what is a fair price to pay for business and can that price they are paying to secure the funding that you need in order to acquire the business. The previous example, we had a business that was being sold for $1 million and generating $200,000 euro profit. As such, should that individual have decided not to sell the business, but rather to simply hold the company for a long period then the owner of that company was even working on investment of 20% year on year. However, and, this is a little bit of a misconception because typically the owner did not spend $1 million in order to build that business. As such, their actual turn on investment may be substantially higher. Again, this is a topic that will focus on much more heavily for discussion of buying existing businesses and selling existing businesses very significant time frame.
The single most important factor when seeking business acquisition financing is to make sure that the business you are purchasing is properly secured the capital that you need. For instance, when doing your due diligence period, should focus not only on the profit and loss of the business but also on the cash flow analysis as well. Again, you should also focus very heavily is the cash flow analysis. This is primarily due to the fact that not you not only need to make the appropriate interest payments upon the outstanding amount of the business acquisition financing facility but you also need to make timely payments of principal that is associated with this loan.
As such, reviewing the cash flow analysis of the business will ensure that you’re able to make the substantial monthly payments as it relates to the principal repayment portion of the loan. In many instances, the actual repayment of principal is a greater expense due to the fact that most credit facilities as it relates to business acquisition financing for a much shorter term than let’s say a traditional mortgage. In many instances, business acquisition financing typically has a term of seven years to ten years. As such, you need to heavily factor this in when determining whether the business you are looking to acquire produces not only in our profits to cover the interest expense but also enough cash flow to cover the ongoing monthly principal repayment. As we have mentioned previously, the best things to do prior to obtaining business acquisition financing is to work with their certified public accountant as well as the business owner. Many certified public accountant, are extremely well-versed in business valuation and they will thoroughly determine whether the business did not only support the interest payments, and principal payments, but also can support the valuation that is being offered by the current owner of the business. Of course, like with any major purchase in life, negotiation is always key when you all are acquiring a new business.
One of the things that you should know in regards to business acquisition financing, is that many of the business owners are willing to sell their businesses to you are willing to hold back a specific amount of the loan in the form of seller based financing. In almost every deal that involves a small business transaction, the seller almost always is willing to carry back a note equal to 20% to 50% of the total value of the transaction depending on the type of business that is being sold. Typically, in high-risk businesses where the focus is more on the actual providing the services, the owner would be willing to carry back a much more substantial note on your behalf. However, if the business is actively engaged in the distribution of products on a retail sale basis then you can anticipate that this will be much smaller seller financed note simply due to the fact that much of the inventory, machinery, and other candle assets at your purchasing through the acquisition will be secured by traditional bank financing and your down payment for the business. As you should do as it relates to the ongoing need for business acquisition financing is that you should have your business valuation expert review all the tangible assets of the business so that you can effectively understand how to properly structure the transaction in regards to working with banks, the seller that is going to provide you with some level of financing support, and other financial is engines that may be assisting you with business acquisition financing.
Returning to something we discussed earlier in this article, business valuation is the single most important aspect when determining whether or not the company you are looking to purchase is the candidate for acquisition. Even though the business may be absolutely fantastic in regards to its profitability and cash flow you may find that the owner of the business is being unable to negotiate a proper price for the company. Most business owners have worked diligently to develop any new business corporation typically think that the value of their company is substantially higher than actually is. As such, again, you should have a business valuation expert review all of the assets and income statements of the business so that you can make an appropriate determination as to what the fair market price of the businesses prior to engaging the seller of the acquisition. This is especially true if you intend to acquire a substantial amount of business acquisition financing as you will need to be paying this credit facility regardless of whether or not you feel you got a good price for the business. It should be noted that many sellers of businesses are conducted transactions through the use of business brokers. These individuals and firms operate in a very similar capacity to that of a real estate brokerage or real estate agent. In short, they’re looking to get the best possible price for their client. As a business buyer, you can also hire a business broker then go and find the appropriately valued businesses that are seeking to acquire in a very quick timeframe. However, you should be aware that in many transactions that use business brokers usually split the fee. As such, your business broker is also a position to help you find the business you need but has the conflict of interest and that they want to have you pay a higher price for the business as well. As such, a third-party business valuation report for you, your business broker, the seller’s business broker, and the seller with a very clear understanding of what the free market value of the business is extremely important. Additionally, when seeking business acquisition financing the bank will typically want a full business valuation report as well from a licensed or certified business appraiser. In many of our other articles pertaining to the acquisition of businesses, will discuss the use of business valuation experts and business appraisers.
In regards to the actual funding for your business acquisition financing needs income in a number of different forms. First, you can seek out a conventional business loan that will be provided to you by the financial institution is available or a mortgage for the acquisition of the piece of real estate. The terms of interest rates and loan covenants that come into this specific credit facility will typically be a little more expensive than any small business administration loan due to the fact that it does not do not have a guarantee from the federal government. Second, and as we just mentioned, you can use any small business administration loan in order to acquire the business that you have found. The small business administration is very keen on providing guarantees for credit facilities as it relates to the acquisition of businesses. This, is primarily due to the fact, that the risks associated with the acquisition of businesses is substantially lower than that of launching a new entrepreneurial venture. The most common small business administration loan that is used for business acquisition financing purposes is the 7a SBA loan. Of all of the loans are available through the small business administration, is the most versatile and will provide you with the best possible benefit when completing a business acquisition.
Additionally, the 7a SBA loan can be broken up into several different segments so that certain aspects of the business park paid off sooner while others are a little longer. For instance, if a business has a tremendous amount of real estate that is owned that part of the SBA loan would be considered as a traditional commercial mortgage while the financing that may be needed to purchase equipment would be treated as finance and carry shorter term. The versatility of the specific type of financing has allowed many entrepreneurs to acquire very successful companies, very easily, and very affordably simply due to the fact that they assets can be financed over different. It should be noted, if you are using a traditional bank then this type of versatile financing might not be available.
Finally, the last method of financing that can be used in regards to acquiring business is simply to pay for the business in cash. This includes not only, potentially putting up all the money on your own, but also includes working with a number of different angel investors equity investors that will work with you to buy the company immediately without the hassles of needing to tour traditional business acquisition finance it. If you decide to take this route as it relates to business acquisition financing then you can always refinance certain aspects of the business once the acquisition is complete. Of course, putting up all necessary capital for the transaction for business acquisition is an expensive proposition, but it may be your best interest financially able to do so. This is especially true if you intend to work with specific investors to assist you with completing a deal in this manner. We will further discuss the benefits and drawbacks of a business purchase as it relates to business acquisition in some of our future articles.
In conclusion, business acquisition financing is a great way to obtain the business that you need while concurrently mitigating some of the risks that are associated with the launch of a new business venture. In many of our future discussions, we continue to focus on the different types of financing that you can use for business acquisitions while also focusing on a number of the issues that pertain to the direct acquisition of the businesses themselves.