How to finance a business acquisition

How to finance a business acquisition

Maybe it’s time to grow your business and one strategy you are looking at is an acquisition. But do you know how to finance a business acquisition?

A Mergers & Acquisitions strategy can help you gain instant market share, technology, expertise, or resources. We love using this strategy to scale a business! 

If you are ready to buy a business or merge with another, you may also need to borrow money. 💰 🤷

I often hear clients saying they don’t know what to do next… so here is how you get a business loan for your acquisition.

STEP 1 – Check your eligibility!

Are you eligible for a business loan? 

First thing first, you must check your eligibility. Determining whether your acquisition is eligible for a business loan involves considering several factors that lenders typically assess.

While each lender’s criteria may vary, here are some key aspects to help you evaluate your acquisition’s eligibility for a business loan:

  • Business Financials: Lenders often evaluate the financial health of the target business. This includes reviewing its revenue, profitability, cash flow, and financial statements. A strong financial track record can increase eligibility.
  • Collateral: The value of assets the target business owns can serve as collateral for the loan. Lenders may consider assets such as real estate, equipment, inventory, or accounts receivable.
  • Credit History: Both your personal and the business’s credit history can influence loan eligibility. A strong credit score demonstrates a history of responsible borrowing and increases your chances of approval.
  • Business Plan: Present a comprehensive business plan that outlines your strategy for the acquired business, growth projections, and how you plan to repay the loan.
  • Down Payment: Your ability to make a substantial down payment can improve your chances of loan approval. It shows your commitment to the acquisition and reduces the lender’s risk.

A good rule of thumb is for the down payment to cover 20% to 30% of the purchase price.

  • Experience and Expertise: Your experience in the industry and managing similar businesses can be a positive factor. Lenders prefer borrowers with relevant expertise to ensure successful management of the acquired business.
  • Industry and Market: The industry and market conditions can impact loan eligibility. Lenders may be more hesitant to finance acquisitions in industries with higher risks or uncertainties.
  • Cash Flow: Demonstrating a healthy and consistent cash flow in the target business reassures lenders that it can generate enough revenue to cover loan payments.
  • Debt-to-Income Ratio: Lenders analyze your personal and business debt relative to your income. A lower debt-to-income ratio indicates a better ability to manage loan payments.

It’s essential to approach multiple lenders and financial institutions to compare loan terms, eligibility criteria, and interest rates.

STEP 2 – Define what you need

Before approving your application, the lenders must understand the purpose of your loan. The type of loan you’re seeking and the purpose of the acquisition (expansion, asset purchase, etc.) may impact eligibility.

Different loans have different requirements. You may need a term loan, a line of credit, invoice factoring, or a merchant cash advance.

Remember that each option will require different documents you must provide. 

STEP 3 – Research your options

Research various financing options, such as traditional bank loans, private investors, or crowdfunding.

Each option comes with its terms, interest rates, and requirements.

We often see clients ready to sign a loan because the interests are low but remember that a loan it’s not only about an interest rate!  

When considering a loan, various factors beyond the interest rate play a crucial role in making an informed decision. Here are some essential factors to consider when evaluating a loan:

  • Total cost of borrowing: Look beyond the interest rate and calculate the total cost of the loan over its entire term. This includes additional fees, origination charges, closing costs, and other hidden expenses.
  • Loan term and repayment schedule: Consider the loan term—how long you’ll make payments—and the repayment schedule. Shorter terms may have higher monthly payments but lower overall interest costs.
  • Monthly payment amount: Evaluate whether the monthly payment amount fits comfortably within your budget. Ensure that you can make consistent payments without straining your finances.
  • Flexibility and prepayment options: Check if the loan allows for prepayments or early repayments without penalties. Having the flexibility to pay off your loan beforehand can save you money on interest.
  • Collateral and security: Understand the implications if the loan is secured by collateral (assets you pledge). Defaulting on the loan could lead to the loss of these assets.
  • Loan purpose and terms: Ensure that the loan terms align with the purpose of the loan. For example, if you’re borrowing for a business expansion, the loan terms should be long enough to accommodate your growth plans.
  • Variable vs. Fixed rates: Consider whether the loan has a fixed interest rate (consistent throughout the loan term) or a variable rate (which can fluctuate based on market conditions). Each has its pros and cons.

Every loan is unique, and what works for one individual or business might not be the best fit for another.

It’s important to carefully review all terms, ask questions, and seek professional advice to make an informed borrowing decision.

STEP 4 – Prep all documents

Before you apply, check with your lenders to learn about the required documents. Prepping these documents beforehand can make for a more seamless process. 

You’ll likely need to provide these documents: 

  • Business valuation: Hire a professional to conduct a thorough valuation of the business you intend to acquire. Understand its assets, liabilities, cash flow, and growth potential will help you determine the appropriate amount to borrow.
  • Detailed business plan: A comprehensive business plan will outline your strategy, goals, target market, revenue projections, and how you plan to repay the borrowed funds. Lenders will want to see that you have a clear plan for the business’s success and a cash flow analysis. Consider how the loan payments will fit into your projected cash flow. Ensure the business generates enough revenue to cover operating expenses, loan payments, and other financial commitments.
  • Collateral and personal guarantees: Be prepared to offer collateral to secure the loan. This could include personal assets or business assets. Lenders often require personal guarantees, meaning you are liable for the loan if the business cannot repay.
  • Other documents: Lenders will also require financial statements, tax returns, credit history, and any legal agreements related to the business acquisition.

After you get pre-approval, the lender will ask you to perform a due diligence on the business you’re acquiring to investigate its financial health, legal status, customer contracts, and potential liabilities. The final approbation will be given after getting a due diligence report from your legal and accountant advisors. 

STEP 5 – Submit your application!

After you’ve prepared all documentation, the last steps is to submit your application for the loan that offers you the best terms possible for your unique situation.

The time it takes to hear whether you’ve been approved will vary by lender and specific loan product.

Remember that borrowing money carries inherent risks, and it’s important to be conservative in your estimates and well-prepared for any challenges that might arise.

Being diligent and well-prepared will increase your chances of a successful business acquisition.

I’d love to know about your own experience with financing an acquisition! Did you get a business loan for your acquisition?

xox

Free Download

Learn the steps that would allow you to oversee the sale of your business with the help of a broker or even give you enough confidence to do it yourself!

The ENDGAME Plan Checklist

Download Now

© Business Atelier 2013 - 2024 | Privacy Policy | GDPR | Terms & Conditions | Website by Saltwater Designs

for

Your anonymity will be protected. You’ll have private access to get your questions answered, so you feel safe and secure knowing your business’s future is in the best hands!  

Get 100+  Tools & Resources to help you plan, design, market, and manage your business

Strategy + Mergers & Acquisitions resources for ambitious entrepreneurs. It's time to prepare and scale your business NOW so that when you’re ready to sell, your business is too.