How to Finance a Business Purchase

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Buying an existing business can seem less daunting than starting a business from scratch. Just like any loan, the rate you get depends on your qualifications. Financing always comes with challenges and headaches. The lender will scrutinize your taxes, credit score, available cash, debt burden, and the finances any other business financing options for buying a business already own. This can be a real challenge for many reasons, and while there is no loan made specifically for business acquisitions, some options are better than others.

Expect them to take a close look at things like:. Provide a formal business valuation. More on this in a bit. Have you run businesses before? Have you worked at a high level at a similar business? Offer an updated business plan. These are the basics:.

So, how are you going to fund this thing? The terms are pretty simple — you borrow a fixed amount of money and pay back the loan over a fixed period of time, and typically at a fixed interest rate. Term loans are the most common type for business acquisition, since they fit with typical costs and the long-term nature of purchasing an existing business. Prepare for one or several lengthy applications to secure a term loan for your business financing options for buying a business.

Rather, think of them as your Government Guarantor. This will increase the chance that you will get approved for funding by mitigating some of financing options for buying a business risk for the lenders through the SBA. Sounds like a no-brainer, right?

Keep in mind, there may be additional rules and complexities around acquiring a business with help from the SBA. But that comes with some cost to you, the borrower. The lender will expect you to pay more financing options for buying a business, usually in the form of at least 20 percent of the purchase price as a down payment. Interest rates on startup loans are also typically higher. A small business equipment loan can be used for virtually any equipment need, from computers, to production machinery, to vehicles and more.

Asset-based financing can reduce the overall amount that you borrow. This decreases your debt burden, and makes qualifying much easier.

Stay smart by identifying and avoiding a few common pitfalls, and lay the foundation for success down the road. Mistakes, mishaps and unexpected disasters are bound to happen. The more you want the business, the easier it can be for your seller to take advantage of you. In other words, do your due diligence: Check the books yourself, or give them to your banker or accountant, to make sure everything is as you were told.

Just be thorough and consider all available options. The above content financing options for buying a business not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. A roadmap to getting financed Buying an existing business can seem less daunting than starting a business from scratch.

Financing for a startup vs. Expect them to take a close look at things like:

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We use cookies to help us deliver our services. By continuing to browse the site you are agreeing to our use of cookies. Find out more here. Once you have decided on the kind of business you want to buy - whether it's a restaurant, a pub, a hotel or even a tropical island yes, they do come up for sale , you will need to address the all important issue of financing your purchase. Few people have the means to buy a business with cash without the need to borrow. This is the same for all buyers - whether they're acquiring a tea shop in Cornwall or a multi-million pound software company in California.

Unsurprisingly, a survey by The British Chambers of Commerce found that banks are the most common form of external finance for small businesses - and this will be the same for you. However, in order to be successful you must make a coherent case for borrowing the money as banks have strict lending criteria. You will often be required to show the following information:. You will need to supply audited accounts for the business you intend to buy, for the last three years where possible.

Make sure that these accounts are a true reflection of the business. A bank can only lend money to you based on these accounts, regardless of any hidden income that an owner may assure you of. This has to be a realistic revenue forecast for the business. You can even create two or three scenarios to give the bank comfort on the likelihood of different outcomes.

You must also detail what your cash flow is going to look like after you have factored in costs - such as repayments of the loan you are taking out. This doesn't have to be an exhaustive page plan but it must make a credible case for the business you are buying, its market and your plans to reach that market - whether you're buying a widget manufacturer or a fish and chip shop.

It should include what you propose to do with the business you are buying, whether you intend to simply run it as it is or improve it. You will need to provide evidence of the value of the business you are buying.

Where possible, this should be undertaken by a professional, such as an accountant or valuation expert who is paid to give a professional business appraisal. In the case of a property based business, such as a restaurant or hotel then a surveyors report will help value the bricks and mortar. If the business is not property based for example a PR company or a recruitment consultancy then you will probably be using a multiple of that business's earnings.

For example, many businesses are currently valued between three and eight times their profit. You will be required to provide contact details for the agent representing the business or the vendor's details if you are buying directly from the seller. A CV with details of your previous work experience will be needed.

Keep this short and to the point, outline relevant experience that will help persuade the bank that they are reducing risk by lending to you. This will detail what you own such the equity in your home or shares and what you owe - including credit card debts and other outstanding loans. Normally, you will be required to make bank statements available for the last six to 12 months.

Anti laundering and fraud legislation now requires proof of your ID and residency, such as photocopies of your passport. If you do intend to go down this route borrowing money from a bank it's important to spend time researching the various loan products available to you. For example, longer term loans but with lower interest rate payments may be preferable to a shorter term loan with a higher interest rate. In cash flow terms that difference could be very important to you in the early stages of your new business - crucial, in fact.

Therefore, don't automatically look at the interest rate - consider the term too. If you decide to finance your purchase without the use of a bank you may also wish to consider the following options:.

These are brokers that help business buyers and owners get the best deal. Some will charge commission to the prospective business owner, while other charge the lender. Either way, having access to a variety of options will help you make a measured and informed decision. Launched in the Enterprise Finance Guarantee EFG is aimed at businesses lacking adequate security or proven track record for a standard commercial loan.

However, the Government has made it easier to apply and the number of people who successfully source funding this way is on the rise. Most sectors are eligible. They are often referred to as 'angels' or 'high net-worth individuals' and these private investors - looking to back new ventures with potential - now make up a sizeable group.

The growth of these backers - the same type of people that may invest in art or property - is partly attributable to some poor stock market returns of late. They may not be investing with the might of venture capital firms but their ethos is the same - a good return on their investment in a short period of time. So if you have plans to buy a business or two, consolidate them and then float on the stock market these are the type of people you might want to approach.

However, there are very strict The Financial Conduct Authority FCA regulations on the best practise of approaching private individuals looking to invest in unquoted companies. You will certainly need the services of a professional - a lawyer or an accountant - before you can target individuals on this basis, even before you draw up any agreements.

For more information about angel funding, contact the British Business Angels Association. There are over venture capital funds in the UK who seek to invest in exciting business ideas with high growth prospects, products and services with a competitive edge and highly skilled management teams.

However, if you are likely to be a business owner interested in running a lifestyle business a business whose main purpose is to provide a good standard of living and job satisfaction for you as an owner then you are unlikely to provide the high financial return that venture capital investors are looking for.

This is not a loan and you will have to give up a big stake in your business. The investor will generally expect to be actively involved in your company and its progress. However, you may have big plans to consolidate a business sector, like nurseries for children or fast food outlets and venture capital might be the way to go. This is one of the newest ways to raise finance. Essentially, it's the process of individuals or groups pooling money to fund other groups, indivduals or businesses.

It's not regularly used to help people purchase pre-existing businesses, but there are those that have had success on site. There are numerous nuances within crowdfunding, though in comparison to most other methods of raising finance, there's a lot of transparency as campaigns perform much better when social media is involved.

Take a look at the Wikipedia article for a list of crowdfunding platforms. You can find our list of buyer articles here , or if you're ready to look at businesses for sale, you can do so by clicking this link.

Jo joined Dynamis in to co-ordinate PR and communications and produce editorial across all business brands. She earned her spurs managing the communications strategy and now creates and develops partnerships between BusinessesForSale.

Raising Finance to Buy a Business Raising finance for a business purchase isn't easy, but there may be more options than you think. Using a bank Unsurprisingly, a survey by The British Chambers of Commerce found that banks are the most common form of external finance for small businesses - and this will be the same for you.

You will often be required to show the following information: About the business Accounts You will need to supply audited accounts for the business you intend to buy, for the last three years where possible. Revenue projections This has to be a realistic revenue forecast for the business. Business plan This doesn't have to be an exhaustive page plan but it must make a credible case for the business you are buying, its market and your plans to reach that market - whether you're buying a widget manufacturer or a fish and chip shop.

Valuation You will need to provide evidence of the value of the business you are buying. Selling agent's details You will be required to provide contact details for the agent representing the business or the vendor's details if you are buying directly from the seller.

About yourself Curriculum vitae A CV with details of your previous work experience will be needed. Asset and liability statement This will detail what you own such the equity in your home or shares and what you owe - including credit card debts and other outstanding loans.

Bank statements Normally, you will be required to make bank statements available for the last six to 12 months. In other words, don't just look at the interest rate - look at the term. If you decide to finance your purchase without the use of a bank you may also wish to consider the following options: Business finance specialists These are brokers that help business buyers and owners get the best deal.

Private investors They are often referred to as 'angels' or 'high net-worth individuals' and these private investors - looking to back new ventures with potential - now make up a sizeable group. Venture capital funds There are over venture capital funds in the UK who seek to invest in exciting business ideas with high growth prospects, products and services with a competitive edge and highly skilled management teams.

Crowd funding This is one of the newest ways to raise finance. Here's 5 Things to Consider Have you always dreamed of running a pub? Then ask yourself these five questions to see if you have what it takes The Etsy Shop When Becky Birkin gave birth to her first child, she found she had time to pursue a new hobby. Are you a Business Owner? Are you a Business Broker?