Business Acquisition Loan – What are The Details?

If you qualify, a business acquisition loan could allow you to buy a company that’s already up and running, open a new franchise location of an established company, or buy out your partner in a business you already own.

At a Glance

With a business acquisition loan, you could purchase a company that already has a successful history.

You could also use acquisition financing to buy out your partner(s) in a business you already operate.

Advantages & Disadvantages

  • SBA financing may be available
  • May be easier than securing start-up financing
  • Can help you achieve your business goals
  • Potentially lengthy application process
  • Collateral sometimes required
  • May require a personal guarantee
  • Down payment (up to 50%) sometimes required

What Is A Business Acquisition Loan?

A business acquisition loan could allow you to buy someone else’s existing, profitable business.

It could also allow you to buy out your partner(s) for a business you already own.

In addition, business acquisition loans may be used to finance the purchase of a franchise, especially a well-established one with many locations and a proven model for success.

Sometimes it's smart to use a business acquisition loan to purchase a thriving company; turnaround financing can be much more difficult to secure.

How Business Acquisition Loans Work

To secure small business acquisition financing, you’ll need to prove that both you and the business present minimal risk to the lender.

You can do this by providing ample documentation of both your personal finances and the business’s finances.

Good credit, minimal debt, and profitability are key.

Small business acquisition loans are available from banks and sometimes from the business seller.

If you can’t secure financing by other means, try getting an SBA loan to buy a business.

Types of Small Business Acquisition Loans

The business acquisition loan for your situation may depend on how strong your personal financial credentials are, as well as how strong the business’s finances are, plus the amount you need to borrow and the length of time you need to pay it back.

Business Acquisition Loan Costs

The interest rate and fees you’ll pay on a business acquisition loan depend on whether you secure seller financing, a term loan, or an SBA loan.

You could pay an interest rate of somewhere between 3% and 10% with a fixed or variable interest rate.

Loan fees may include application fees and third-party closing costs.

If you’re getting an SBA loan for longer than one year, you may have to pay a guarantee fee of 3% to 3.75% depending on the amount borrowed unless the lender chooses to pay it (which usually means you’ll make up the cost elsewhere in your loan).

Which Loans Are Best for Funding A Business Purchase?

Seller Financing

A business’s existing owner will often lend the new buyer money – possibly up to 70% of the purchase price – to help with the acquisition.

The buyer gives the seller a down payment for the rest, then repays the loan in fixed amounts over a predetermined period or in payments based on the business’s future performance (called an “earn-out”).

Seller financing can also be combined with other forms of business acquisition financing.

Seller financing could allow for great flexibility in loan terms and offer some reassurance that you are making  a good decision:

It may tell you that the current owner expects the business to continue to be profitable.

The process may also be quicker and easier than securing bank financing.

Term Loan

Borrow money from a bank and make fixed monthly payments for a predetermined number of years.

The drawback of this common and easy-to-understanding financing option is that you may need to apply with several business acquisition lenders before you get approved, and the applications can be long.

Some term lenders offer interest-only payments and promise a short application process and funding in just a few days, however.

Learn more: Why Choose A Traditional Term Loan?

SBA 7a Loan

This bank-issued, government-guaranteed loan may allow you to borrow up to $5 million even if you’re turned down for other loans (that being said, the average loan amount for fiscal year 2015 was about $372,000).

Expect to put down 10% to 30%.

You’ll need a personal credit score of at least 680, and lenders would prefer that you have several years of industry or business management experience.

The business you want to buy should be financially strong, and you should be able to put up business or personal assets such as inventory, equipment, working capital, or real estate as collateral.

Learn more: Everything You Need To Know About SBA Loans.

Startup Loan

Startup loans are harder to qualify for, but they may be available for new entrepreneurs.

They function similar to term loans, but startup funding comes from a lender who is willing to work with a lack of revenue or credit history on the part of the business being purchased.

Learn more: All About Startup Business Loans.

Equipment Financing

If the majority of the purchase price for the business you’re acquiring is based on the value of equipment being transferred, an equipment loan might be the right source of financing for your business acquisition.

Think of equipment financing like an auto loan: you can only borrow against the value of the asset, and the asset itself serves as collateral.

Learn more: An Entrepreneurs Guide to Equipment Financing.

Other Acquisition Financing Options

If seller financing, term loans, and SBA loans are out of reach, you might consider financing a business acquisition using your retirement account or a home equity loan.

Keep in mind though, that these options will put your personal assets at risk.

How To Qualify

Lenders won’t necessarily have hard cut-offs on particular loan qualifications; what they’ll want to see is a strong overall picture.

So, for example, if you have excellent credit and high-value collateral, the lender might only require a small down payment of 10%.

If you have merely good credit and good collateral, you may need double or triple the down payment.

Even with excellent personal finances, it may be irrelevant if the business is in terrible shape.

Demonstrate that the lender won’t be taking on too much risk; show that you and the business you want to buy are strong candidates to repay every penny with interest.

What are underwriting criteria for business acquisition?

Specific business acquisition loan requirements vary by lender and loan type, but all will want to see a strong personal and business financial history.

If you want to get a loan to buy a business, it will need to show at least two to five years of stable or growing revenue and overall profitability.

If the business has any financial weaknesses, you may be able to compensate for them by pledging sufficient collateral.

Lenders may not include name recognition and industry goodwill in their decision since these assets are difficult to value and might be unique to the current owner.

Business acquisition lenders might look more favorably on professional services firms with steady income, such as medical and dental practices, veterinary practices, accounting firms, and law firms.

They may look less favorably on risky businesses such as restaurants, strip clubs, and gambling establishments.

They could also consider buyouts less risky since you have already shown some experience running the business successfully; the perceived risk of instability is lower.

What are the personal finance requirements for a business acquisition loan?

Lenders may want to see two to three years of your personal tax returns.

Having a credit score of 680 or higher will give you the best chance of getting your business purchase loan approved, and a higher credit score will help you secure a lower interest rate.

You’ll also need a personal financial statement and verification of your down payment and/or collateral.

You may be asked about your personal history of bankruptcy or foreclosure.

For SBA loans, you must not be delinquent on any debt payments you owe to the U.S. government.

Learn more: Personal Credit for Business Loans

How will the business being acquired be evaluated?

The current business owner will need to provide the lender with information about its financial condition.

The lender will want to see a balance sheet showing the value of the company’s tangible, fixed assets (some of which could serve as loan collateral) and its liabilities and debts. They’ll also want to see two to three years of tax returns and an income statement.

Lenders desire strong cash flow, profitability, and reasonable debt levels (or no debt at all).

The business should also have a good credit score and not be delinquent on payments to lenders, suppliers, or employees.

If the lender discovers a problem with the business and rejects your application, you will probably feel disappointed at first, but try to look at the outcome this way:

You’ve been spared a risky investment!

How to Request a Business Acquisition Loan

You’ll typically need to submit the following documents to request a business acquisition loan:

  • Business Plan
  • Business Tax Return
  • Balance Sheet
  • Personal Tax Return
  • Bank Statement
  • Business Lease Agreement
  • Business Debt Schedule
  • Business License

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