5 steps to finance a business purchase

5 steps to finance a business purchase

Business financing options are important if you are ready to buy a company you have been in for years or want to acquire a competitor to expand your market share. Buying an existing company is often a smart move. You can build on branding, products and customer base that the company has established, while improving your business through your own ideas and efforts. Financing purchases of an existing company may be more complex than starting a new company, but a number of options are available to you. Here are five steps to help you navigate the world of business finance options.

Work with a business broker

Start your process by establishing a relationship with a business broker. According to Inc. Magazine, the best brokers will be members of the International Business Brokers Association and hold the CBI designation, or be members of the M & A source with the M & AMI designation. Experienced brokers can help you manage the buying process from identifying the right company to secure financing. Brokers have large networks in the financial world, and the experience will help you find the option that suits you. If the broker you work with represents the company seller, it is important to consider it and make sure you have sufficient representation.

Feel your valuation and do your due diligence

Your broker will help you manage the valuation process. Plan to get other opinions from your lawyer and CPA. Make sure you understand how the business is valued. The cash flow method, for example, looks at future cash flow to see what kind of loan the business can support. The material asset method appraises an enterprise based on assets in the balance sheet. Different methods are acceptable and appropriate for different business models, but should be supported by your own due diligence. Most companies are valued as a number of results earnings before interest, taxes, depreciation or EBITDA. Review at least three years of financial items, returns, contracts and leases, customer data, marketing materials, HR information and other facts that you can collect.

Think about home-funded purchases

According to the International Business Brokers Association, sales finance becomes more common than other methods. Merchant Finance is an alternative to commercial banks or small business loans. Usually, the seller has a note about the sale of a company for a period of up to ten years. Smaller monthly payments are usually arranged and one or more balloon payments pay the bulk of the debt. Seller Finance shows that a seller is invested in helping the new owner to succeed. This can be very convincing for banks when a buyer needs more funding sources to complete a deal. A business broker can help negotiate and structure an owner-financed business.

Evaluate loan options, especially small business finance programs SBA

Regular bank loans can not be available to finance a small business purchase. Instead, buyers work with an SBA lender with an SBA 7 a acquisition loan. SBA works with approved lenders eg qualified banks to offer SBA loans. The government returns these loans and reduces the risk of participating banks. Programs under this umbrella range from micro-credit initiatives that offer under $ 50,000 to the Certified Development Company 504 Loan Program, which helps companies to buy land and buildings.

Connect with angel investors and other highly worthy people

Depending on the type of business you are buying and its financial potential, an angel investor or venture capital company may be able to consider. Angel investors are high value-creating people who offer money in return for equity in the company. Highly worthy people and some private equity groups sometimes offer private, unsecured loans called mezzanine funding. These loans often have higher interest rates. For individuals with a lower credit history who do not qualify for other options, angel winners are worth exploring. Business brokers often have a network of individuals on the market for specific offers. If your story and your business meet their requirements, they can facilitate an introduction and structure a transaction.

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