Business Acquisition Financing: What Is It and Why Do You Need It?

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Are you a part of the 48% of business owners that don’t have an exit strategy in place? 

Selling a business or acquiring growth capital isn’t as simple as a five-minute press release. By having a plan in place, you’re able to accurately define the value of your business and limit your losses or exit with a substantial profit.

Business acquisition financing benefits both buyers in purchasing a new company and sellers with their exit strategy.

Keep reading to learn more about business acquisition financing and how it can help you and your business. 

What Is Business Acquisition Financing?

Simply put, it’s the process of obtaining capital to purchase another business, in other words, getting ahold of funds needed for a merger or acquisition

If a small company receives funding and acquires another company, it can benefit from scaling its operations. 

How an Acquisition Loan Works

Companies can achieve acquisition financing in several ways. The more prominent choices are using a line of credit or seeking out a traditional loan. Other forms of funding can come from small business loans like the SBA 7(A) loan, owner financing, lending services, and utilizing debt security. 

But before you search for acquisition funds, you need to conduct an evaluation and determine the fair market value with an accredited business appraiser. 

When conducting an evaluation, you need to pay attention to two key factors; risk and cash flow. 

Once a valuation is determined, the buyer and seller start negotiations on the final terms and price. This stage of the acquisition requires a letter of intent that you want to ensure is legal, so you’ll need a team of business financial consultants to draft and look through it all. 

The Best Loan for Your Business

After agreeing on price and terms, the final step is to decide which financing option to pursue. As mentioned earlier, you have several options. 

Before you draw up paperwork to apply for the 10% down SBA 7(a) loan program, there are several qualifiers to consider. Some of these requirements include:

  • Loan size
  • Average net income
  • Business size

In addition, you’ll need to gather documents as proof. This can be everything from accounts receivable, business and personal tax returns, and financial statements. 

If your company is able, using debt security like bonds may be more advantageous than a private lender or bank loan. 

There’s also equity financing. That’s when a company raises funds by selling shares. An acquiring company is likely to use equity financing to acquire smaller companies that have unsteady cash flow. 

Owner financing is an option if the buyer and seller have agreeable terms. This type of financing involves the buyer placing a down payment directly with the seller. It’s the seller’s responsibility to finance a portion or entirety of the remaining balance.  

Owner financing is an excellent option for the seller because they may have more income if adequately structured. The buyer benefits from lower costs and potentially better terms than if they were dealing with a bank. 

You Don’t Have to Do It Alone

Business acquisition financing is a tremendously beneficial way to exit your business or to acquire another company so you can scale. It can seem daunting at first, but there’s no need for you to go at it alone. 

If you’re looking for a way to devise a profitable exit strategy or wanting to acquire another company and need financing, schedule a consultation with one of our experienced team members.