Acquiring a business often hinges on having access to sufficient funds to complete the transaction. There are several ways to obtain financing, each with its own unique considerations and priorities. To increase your chances of a successful purchase, it’s crucial to understand the expectations and requirements of different funding sources. Let’s explore four primary financing options and how to tailor your approach to achieve the best possible outcome.

Securing a Bank Loan

One of the most traditional methods of financing a business acquisition is through a bank loan. In the U.S., popular options include SBA 504 and 7(a) loan programs. With a 7(a) loan, buyers can qualify for up to $5 million, making them a good option for a wide variety of business acquisitions. They also have flexible terms and competitive rates. However, these programs can come with strict eligibility criteria, and both the buyer and the business being acquired undergo rigorous evaluation.

As a potential business owner seeking SBA financing, your previous experience will play an important role. Being able to demonstrate expertise in certain business fundamentals such as accounting, strategic planning, and industry-specific knowledge can significantly bolster your application. Industry-specific qualifications will also play a pivotal role. For example, if you’re planning to purchase a restaurant, you should be prepared to showcase your understanding of the restaurant industry, including its operations, challenges, and opportunities, or have a history of working in the industry.

Banks will also scrutinize your personal credit history and typically require collateral to secure the loan. This might include business assets, your personal residence, or other significant guarantees. Additionally, lenders will expect a detailed business plan that outlines your strategy, loan utilization, and projected returns on investment.

While the process may seem overwhelming, successful approval indicates that your business proposal has passed a thorough vetting process. To navigate this process more effectively, you can seek assistance from a professional, such as a business broker, who can not only assist you in finding a business, but also with formulating a business plan.

Borrowing from Friends and Family

Another potential source of funding is an angel investor, which could be an individual or a group willing to invest based on their belief in you or the business you’re acquiring. One advantage of this option is the flexibility in terms, often influenced by your relationship with the investor.

Unlike banks, angel investors may be less deterred by high-risk factors if they see strong potential for profitability in the venture, or have significant trust in the borrower. However, it’s essential to have clear legal agreements in place to address scenarios where the capital is lost or returns are delayed. Though these agreements may not be as formal or exhaustive as those required by traditional lenders, they are vital for ensuring transparency and protecting both parties in case of disputes. If you have a close rapport with the investor, it is crucial to be communicative and lay out clear expectations for both sides, so that the success or failure of the investment does not damage your relationship with them.

Exploring Seller Financing

Seller financing involves the current business owner providing part of the financing for the sale. While this can be a more straightforward and faster option than other funding sources, it requires careful negotiation and mutual terms agreement.

One major benefit is that seller financing typically has fewer qualification requirements, and the previous owner may actively support your success to protect their financial interest. This arrangement also signals that the seller believes in your ability to maintain and grow the business.

However, seller financing generally covers only a portion of the purchase price, often around 50%. They may also wish to continue being involved in the business, albeit in a lesser role, to help guide its future success, especially since it’s in their financial interest to do so. Still, this can be an effective way to close a funding gap or complement other financing sources.

Moreover, other lenders may view your application more favorably if they know the seller is willing to invest in your success. In fact, some lenders may even require this assurance before approving additional funding.

Raising Venture Capital from Investors

Another potential source of funding for your business acquisition is venture capital. This option involves securing investments from individuals or firms that believe in your company’s growth potential and are willing to provide significant financial backing. To attract venture capital, you must prepare a comprehensive business plan, a compelling value proposition, financial forecasts, and an engaging pitch deck.

The process of obtaining venture capital can be rigorous. Investors usually take time to understand you, your business, and your vision before making a commitment. A strong way to initiate contact with investors is through a mutual connection who can introduce you and vouch for your character.

Keep in mind that this process is not quick or easy. Investors will likely want to observe how you manage the business before committing to a significant investment. Even after initial funding, they might prefer a phased approach, providing additional capital only if early results are promising. They preserve the right to abandon the venture by refusing to invest more money. They typically also design contracts giving them the right to invest more if results are encouraging.

One distinguishing characteristic of venture capital is that investors typically expect ownership of a significant equity stake in return for their investment. Their aim is to reap substantial profits by selling their shares when your business achieves high valuation. While venture capital offers significant advantages, it’s not always the best starting point. Instead, consider it as a second or third step in your funding journey, once you’ve demonstrated your business’s potential and solidified its foundation.

Each of these options comes with its own advantages and challenges. By understanding the priorities of each funding source and preparing accordingly, you can position yourself for a smoother acquisition process and a successful business venture.

If you are looking to purchase a business in Southwest Florida, it is critical to choose a broker who has the experience and resources to guide you through the process of getting your transaction funded. Corporate Investment Business Brokers (CIBB), headquartered n Fort Myers and Sarasota, has been helping business buyers achieve their acquisition goals since 1986. Contact us to learn more about the purchase process or view our current listings to get started.