Your guide to business acquisition loans

Acquiring an existing business can be a smart way to expand your portfolio or enter a new market, but the purchasing process requires careful consideration and financing options. One of the most common ways to fund this type of transaction is through a business acquisition loan. So, what exactly is this type of financing? And what do you need to consider before you close the deal? Here's everything you need to know.

What is a business acquisition loan?

A business acquisition loan provides funding to purchase an existing business, enabling entrepreneurs or companies to expand by acquiring another business’s assets, operations, or client base.

This type of financing will often cover both the purchase price and other initial costs. It typically comes with flexible repayment terms that align with the business’s cash flow, making them a viable option for businesses with proven profitability and growth potential.

What to think about before buying a business

Taking over an existing business can be a great opportunity, but there are a few key items you should tick off before closing the deal, including:

• Understand why the business is being sold
• Conduct thorough due diligence on the target business's finances
• Evaluate the business’s profitability and growth potential
• Ensure the business is compliant with all relevant laws
• Understand the business's structure and its implications
• If getting a loan, ensure the repayment aligns with expected cash flow

The benefits of buying an existing business

Acquiring an established business offers several benefits that can fast-track your growth and success:

Proven business model

One question that's crossed the minds of all entrepreneurs is, 'What if my concept doesn't work?'. And as much as you can forecast, the reality is that when you start a brand new business, you simply can't guarantee how successful it will be.

When you take over an existing venture like a franchise, you inherit a tried-and-tested business plan and revenue model. You can have more peace of mind, knowing which strategies have succeeded and which haven't. You'll need to innovate as you go, but you start off with a solid operational foundation and can hit the ground running with more confidence.

Established customer base

Did you know that it can cost 5 times more to acquire a new customer than to retain an existing one [1]? When you buy an existing company, you get access to an established pool of customers, which will likely provide an immediate stream of revenue with lower effort on your part (both in money and time).

Of course, you'll need to invest in customer retention strategies and put in effort into continuously improving relationships and customer satisfaction. But you can skip the initial brand-building stage, which is one of the most resource-intensive parts of starting a business.

Existing cash flow

One of the main challenges of starting a brand new business is managing cash flow, particularly during the earlier stages when expenses are often higher than revenue. However, with an existing business, and its proven record and loyal customers, chances are that you'll be able to generate cash flow immediately.

This gives you a significant financial head start—and the flexibility to pay off any acquisition debt, invest in growth strategies, or reinvest in the business without having to wait for it to become profitable.

Existing relationships with vendors and suppliers

By now, you'll start to see a pattern. The key benefit of purchasing an established business is that a lot of the groundwork has been done, and that includes the relationships with vendors, suppliers, and manufacturers.

Not only do you not have to spend time researching vendors and building those relationships from scratch, but you may get instant access to favourable pricing, terms, and delivery schedules. You can also ensure a continuous flow of goods and services during the transition period between the previous owner and yourself.

Brand recognition

Brand recognition is an incredibly powerful marketing tool, but one that can take a long time to build. Buying a business that's already a well-known brand can make it easier to attract new customers, as you don't have to put as much effort into introducing your brand. People already know who you are, so you can focus on growth rather than brand awareness.

The drawbacks of buying an existing business

Depending on which business you buy (and how much research you did before finalising the purchase), there are potential hurdles you may have to deal with:

High initial investment

Buying a business is a big financial commitment, and while the initial cost can be substantial, but it's important to remember that it is a long-term investment. And if the proven business model, established customer base, and existing cash flow are there, you may see the fruits of your investment sooner than you think.

Nevertheless, for most, the hefty upfront cost can be difficult to cover, which is where securing a business acquisition loan can help. This is also why doing your due diligence is so important—to make sure the investment is worth the risk.

Inherited liabilities

Whether it is outstanding debts, intellectual property issues, or pending lawsuits, buying a business means taking on their liabilities too—and resolving them can not only be expensive but also damage your reputation. Once again, doing your homework and checking the business's financial health and legal standing can help mitigate this type of risk.

Risk of overpaying

If the business's valuation is inflated—which can happen because of unrealistic growth expectations or pressure to close the deal quickly, for example—you can end up paying more for it than it is actually worth. As a result, the ROI may be lower than expected, and it may take you longer to recoup the acquisition price.

To prevent this from happening, be sure to get an independent business valuation done by a professional, who can base it on realistic numbers rather than incomplete information.

How to get a loan to buy a business

There are a few steps to securing a business acquisition loan. In a nutshell, you'll need to:

1. Prepare all relevant paperwork, which could include the business's financial statements, tax returns, and a detailed business plan. You may also need to provide personal financial information to demonstrate financial stability, but this can vary from lender to lender.
2. Understand how much you need to borrow (taking into account the purchase price, plus additional costs like working capital and initial business expenses).
3. Apply for the loan and, once the application is approved, negotiate the loan terms to ensure they align with your financial goals.
4. Sign all relevant documents and close the deal.

Sound like a lot to take on? Valiant can help. Simply tell us a bit about your business loan needs and immediately receive quotes from over 90 bank and non-bank lenders. Confirm your quote and we handle your business loan approval so you can focus on what matters—your business.

Tips for successfully financing a business acquisition

Throughout this article, we've sprinkled some tips for increasing your chances of success when applying for a business acquisition loan. The secret truly is in careful preparation:

• Do your due diligence and make sure the business you're buying is financially healthy.
• Prepare a comprehensive business plan including market analysis, financial projections, and operational strategy.
• Review your financial situation, including your credit score, liabilities, and financial stability.
• Consider all financing solutions and choose the most appropriate for your circumstances.
• Work with an experienced broker like those at Valiant.

Business acquisition loan FAQs

Q. Do I need collateral to secure business acquisition financing?

You may need collateral to get a business loan to purchase a business. This could be property, equipment, or other valuable assets.

Q. Can I get a business acquisition loan if the business has existing debt?

Although it is possible, it is considerably harder. Because it is a riskier move, lenders may ask for additional collateral, a larger deposit, or a stronger financial profile.

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References

1. https://www.ipsos.com/sites/default/files/publication/2003-08/Ipsos_Loyalty_Myth_8_Excerpt.pdf