22 Jul 6 Tips for Securing a Business Acquisition Loan
Acquiring an existing business can set you on a fast track to growth without building from the ground up. But unless you have the full purchase price in cash, you’ll need to secure a business acquisition loan.
These loans are about confidence. You convince lenders that your strategy makes financial sense and you’re equipped to run the new business successfully. That takes preparation and documentation. Use these six tips before applying to secure your business acquisition funding.
1. Think Like a Lender
When you apply for a business acquisition loan, lenders want details about you, your business, and the company you’re buying. Prepare financial information in these three areas and review it like a lender. Flag areas that cause you concern and note strengths in your plan. Knowing the details of your business strategy allows you to secure the lender’s confidence.
Personal Assets
Start with your personal financial position. Outline your credit history, current loans, sources of income, investments, liabilities, and assets. You may not use these accounts to secure the business acquisition loan, but lenders love people who demonstrate consistent reliability across their finances.
Your skills and experience are another type of asset a lender will consider. You increase your appeal to lenders if you’ve managed a business, have deep industry knowledge, invested in similar companies, or handled a previous merger. If you don’t have these experiences, don’t worry. You can strengthen your position in other ways.
Current Business Assets
Prepare a business financial report for your current business. Include the elements of a personal report and find information about repeat customers, revenue, record keeping, tax returns, and growth plans. Investors like to see that you have nothing to hide and that your business is predictable.
Lenders will consider your company’s financial strength when evaluating risk. They ask themselves, “If things don’t go perfectly post-acquisition, can this person still repay the loan?” Prepare a worst-case-scenario plan that outlines how your company will repay the loan regardless of the acquisition. Use evidence of your company’s stability and profitability in its financial statements to support your plan.
Targeted Company
Gather as much information about your targeted company as you have about your business. Include any strengths that drew your attention to this company in the first place, like complementary products or a prime location. Prepare growth forecasts to show how acquiring this business will lead to more profits overall. Lenders will closely examine the company being acquired since it is the greatest risk in the investment.
2. Prepare Your Finances
Preparing your personal and business finances means decreasing liabilities and improving credibility. You decrease your liabilities by paying down your debts, securing asset insurance, and staying current on all your payments. To improve your credibility, update and streamline your records, outline a budget, and demonstrate how you have remained within your means. These actions generally demonstrate your financial stability.
For a business acquisition loan, specifically prepare a significant down payment. The more cash you can contribute to the deal, the better your chances of approval. Many common loans for business acquisition require 10 to 25% up front. It is worth liquidating assets and arranging the appropriate amount before applying to lenders to show lenders your commitment to the acquisition.
3. Build a Solid Business Acquisition Plan
Think of your acquisition plan as a business plan specifically focusing on purchasing and transitioning. This document should answer critical questions like:
- Why is this a smart business to buy?
- Why is now the right time to acquire this company?
- Why are you the right leader for this acquisition?
- What are the business’s strengths, weaknesses, and opportunities?
- How does this company complement my current business?
- How do you plan to operate it post-purchase?
- What’s your plan for growth, staffing, and customer retention?
The more detail you provide, the more confident a lender will feel. Account for any changes the targeted company or your company is undergoing. Your plan should show that you’re planning a future for the business you’re buying.
4. Consider Working Capital Needs
An often overlooked point in a business acquisition plan is securing funds to cover business needs during the transition period. You will need additional capital to maintain inventory levels, cover payroll, upgrade equipment, pay costs for new locations, or invest in marketing to retain customers. Plan the working capital amount into your business acquisition plan.
Some lenders will structure your loan to cover both the purchase price and early operational costs, but consider other options too. Working capital lenders offer business lines of credit and merchant cash advances as separate financing to cover your costs. Or you may be able to lease equipment from your company to improve your cash flow.
For example, you’re acquiring a small veterinary clinic. You plan to hire an additional technician and update the scheduling system to improve efficiency and increase patient capacity. You estimate the cost of those improvements in your business acquisition plan, and list equipment leasing of the medical equipment or a business line of credit as options to cover those costs. Now your plan demonstrates your thoroughness and builds confidence in your lender.
5. Study Different Loan Types
There’s no one-size-fits-all loan for business acquisitions. Take time to compare rates, terms, qualification requirements, and flexibility. Speak with lenders specializing in business acquisitions and ask how their products fit your specific situation.
Here are some common options you might explore:
- Term Loans from Banks or Alternative Lenders: If you have strong credit and a solid acquisition plan, a traditional term loan might offer quick approval and flexibility in how you use the funds.
- Mezzanine Loans: Mezzanine lending is ideal for small-to-medium enterprises (SMEs) with equity as a major asset and acquisition costs in the tens of millions that traditional loans will not cover. This loan is highly structured to fit your situation’s debt and equity balance, so it is worth reviewing with loan experts.
- Asset-Based Loan: If your current business has valuable assets like commercial real estate, machinery, or inventory, this loan option uses the value of your assets to secure you a term loan with low financing costs and flexible terms. This option is especially valuable if your credit history is less than perfect.
- SBA 7(a) Loan: Backed by the Small Business Administration (SBA), these loans offer long repayment terms and competitive interest rates but require extensive documentation. They are popular for acquisitions, especially if you need to borrow up to $5 million.
- SBA 504 Loan: This option is ideal if your acquisitions involve real estate and you have a significant down payment. Like other loans backed by the SBA, this loan has specific qualifying requirements but provides security, flexibility, resources, and low interest rates.
- Business Bridge Loan: If you need financing faster than traditional loans for your business acquisition, this loan can provide funding until you secure long-term financing. Look for options without prepayment penalties and other fees to avoid overpaying for a bridge loan.
6. Add Professionals to Your Team
Work with experts in business acquisitions to signal to lenders that you’re serious, prepared, and committed. If you have little personal experience to offer as an asset, having professionals on your team is the best way to improve your position. Show your leadership skills by creating teams of experts and leveraging their advice.
Even the most experienced entrepreneurs benefit from a professional protecting their interests. Work with a CPA to review your compiled financial information, a financial advisor to improve your finances, a lawyer to help with contracts and due diligence, or a loan advisor to structure deals in your industry. Their input can help you avoid costly mistakes.
Apply with Confidence
Securing a business acquisition loan is about making a compelling case for your opportunity and yourself. Using these six tips builds confidence like a house with a strong foundation. You show that your plan is an opportunity worth the risk and present yourself as a well-prepared, strategic buyer lenders can trust to turn borrowed capital into new growth.
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Infographic
Buying an existing business can be a powerful way to accelerate growth. However, unless you’re paying entirely in cash, you’ll likely need a business acquisition loan. This infographic provides tips for securing a business acquisition loan.
