Top 10 steps to follow: How to financing the purchase of an existing business?

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Do you want to know how to financing the purchase of an existing business? In this article, we will discuss 10 effective ways that will help you finance a business purchase. Many buyers forget to consider a few important factors when making their initial plans. Acquisition of financing business is the only part of the game. You still need funds to run the business after the purchase.

There are many benefits to buying an existing business. You will have an established customer base, knowledgeable employees, and reliable cash flow. This will help you get paid for each park-based purchase, but it’s not an easy feat to do.

Before that, you try to secure loans or funds and research on how to finance an existing business? Here we are discussing what you need to know about financing your business acquisition.

financing-the-purchase-of-an-existing-business

Follow these 10 steps to know how to financing the purchase of an existing business.

Your own funds

The easiest way to finance a purchase business is to use your own funds. These funds include your savings, retirement account, and maybe your home equity. While you may need to use some of your funds to make purchases, it is not uncommon for someone to acquire a business using only those funds.

There are very few people who will be able to achieve larger business. Instead, most buyers use their funds in association with sellers’ financing and a business loan. This leverage allows them to buy a larger business.

Vendor financing

Another common way to finance the purchase business is to ask sellers to provide the funding source. In this situation, the seller provides you with an amortized loan over time. You usually pay off, usually from business income.

Business buyers prefer seller financing because it is easier to find than conventional financing. It is more flexible. This gives the seller a vested interest in disclosing the exact performance information, and it can be cheap.

Financing from banks

It can be challenging to get a commercial bank’s conventional loan for a company’s purchase business. As a rule, banks lend funds against existing assets, not against business plans. So, to get a loan, you must have sufficient assets, fair personal credit, and a strong business track record.

For most conventional borrowers, their best bet is a bank loan guaranteed by the Small Business Administration (SBA), to cover the next point.

Source of SBA loan

One of the best options for financing a purchase business is to use an SBA loan. SBA does not lend itself. Instead, it provides banks with guarantees and security measures that can finance revolving purchase. When the SBA sets specific minimum eligibility guidelines, banks have the freedom to engage in those guidelines that they deem appropriate.

To qualify, potential borrow recipients must:

  • There is a decent credit.
  • Be able to keep 20% down (some of this can be paid for through seller funding, see # 2)
  • Provide personal financial information
  • Provide three years of tax information
  • Show that they have sufficient experience in the industry that is on purchase target.

Leveraged buyout

common financing source for buying a small business is a leveraged buyout. A leveraged buyout allows buyers to maximize their returns by reducing investment cash. Lifting the property can increase the rescue, but it has a significant disadvantage. If things don’t go right, leverage can also maximize your losses and negatively impact your return rate.

In principle, the structure of the transaction can be relatively simple. To help finance the purchase business, you can raise some business assets such as equipment, real estate, or inventory. In small firms, leveraged buyouts are usually a combination of seller financing and a bank or SBA loan.

Assumption of debt

There are common two ways to purchase an existing business. You can buy either property or stock. If you purchase assets without “bad liability” (think “future litigation”) – that’s precisely what you get. On the other hand, if you buy the stock, you will get all the assets, liabilities, and risks.

Most business “asset-purchase” acquisitions involve the transfer of certain assets and liabilities. This point is essential because it is the part of your payment to the seller that may estimate the existing business debt. This process can be complicated, as you often need the debtors’ approval before accepting the loan.

“No-Money Down” Opportunities

Entrepreneurs typically look for businesses that “don’t lose any money.” These entrepreneurs are expecting 100% external or vendor funding. This transaction does not exist. Think about this point from the seller’s point of view. 

What is their motivation to give someone 100% funding? If they are sellers, they must be desperate. And donors usually want to see new owners who have some “game skin.”

Some transactions may meet these criteria – like winning a lottery. In other words, “possible, but not possible.” It is better to be prepared to keep some money.

Keep closing costs in mind.

Keep in mind that financing usually increases your closing costs—these closing costs include your contribution to the business’s purchase. The amount of budget you need for closing costs varies depending on the amount of business you want to take on and the type.

It’s a good idea to budget at least 10% of the purchase price for closing costs – and more (20%) is usually better.

Finance operations

Buying a business is only half the battle. Once you have successfully purchased your business, you need to make sure that you have sufficient funds. If you need additional operational funds, it is best to discuss this when negotiating a purchase. It can be challenging to get funding right after buying a business.

Multiple sources of money

It is common to use multiple funding sources to achieve an existing business. For example, suppose that a partnership of individuals wants to buy a $7M company. One way to structure this transaction is to use:

  • $4,000,000 from an SBA Loan
  • $2,000,000 through seller financing (perhaps with some standstill provisions)
  • $1,000,000 in purchaser funds from partners

Additionally, partners may include a line of credit or a factoring line to manage cash flow after the sale closes. This is just one example of the scene. There are other ways to structure this transaction, depending on its nature, assets, and buyers’ background.

Read also: Wells Fargo Business Loan: Any One’s Right for You?

FAQ: How to financing the purchase of an existing business

How can you buy an already established business?

You can purchase an existing business but decide what you are looking for. Buying a business is a big decision that will affect your life and livelihood for many years to come out.

  • Research available business.
  • Consider working with a business broker.
  • Do your best. 
  • Acquire the necessary funds. 
  • Draft sales agreement.

What are the risks of buying an existing business?

Risks to buying a business in your case:

  • Branding is wrong. 
  • The challenge with business integration. 
  • Failure to clear seller liability. 
  • Inadequate assessment of maintaining management. 
  • Seller suppliers will not sell you. 
  • Overleaving

How much money can you loan to buy an existing business?

The amount you can borrow usually depends on the lender, the loan product, and your application evaluation. Typically, you can be able to take a business anywhere from $250,000 to $50,000,000. However, business loans range from $5 million to over $50 million.

Is buying an existing business a good idea?

Buying an existing business is more expensive than starting a new one. In another sense, financing to buy an existing business is comfortable rather than starting a new business. Buying an existing business will give you legal rights, including patents or copyrights, and other essential documents.

How do you determine if a business is worth buying?

There are several ways to determine the market value of your business.

  • The value of the property. 
  • The business is based on earnings. 
  • Use earning qualities. 
  • Analyze discounted cash flow. 
  • Go beyond financial sources.

Read more: Top 10 steps to follow: How to buy an existing business