Business Acquisition Loans Can Launch Your Dream, Here’s What You Need to Know
Owning a business has long been part of the American dream. Some entrepreneurs come up with an idea and then act upon it. Others go the traditional job/career route and then become disillusioned or disappointed with their career path, the company or the industry. After years of the corporate rat race, business ownership arises as a path to earning a good living and achieving self-fulfillment.
Not everyone is inherently creative. If that’s the case, purchasing existing business could be optimal. The advantages are many:
- Buying an existing business means that you do not have to search for a location, source for equipment and make many of the mistakes that inexperienced business owners make
- Since the company has an operating structure in place and an existing customer base, there is less risk involved than starting an entirely new venture
- By looking at the company’s financial records before you buy it, you can actually determine how much revenue you need to make in order to be profitable.
- Obtaining funding for a business that already has financial records and, hopefully, a history of success, is much easier than obtaining startup loans.
A company may be up for sale for a variety of reasons. Perhaps the owner is looking to retire and no relatives want to take over the company. Or maybe the founder is a serial entrepreneur and is ready to move onto the next great thing. Of course, another reason could be that the company is not doing as well as predicted and the owner just wants out.
Finding the right business to buy can be a challenge. Word-of-mouth in the local community is one way to hear about a company is on the market. To pursue business ownership in a particular industry, there are often ads for businesses that are for sale in trade magazines. The internet can help, of course. Bizbuysell is the web’s top business-for-sale marketplace, with more business for sale listings (45,000 currently), more unique users, and more search activity than any other service.
Similar to starting a venture from scratch, there are many considerations:
- Type of business
- Partners/management team
Type of business
Many people get burned out working for years in a corporate setting and then decide to go out on their own. This happens in many different industries: food & beverage, accounting, and other professional services. Instead of working for someone else, the entrepreneur will buy a business and be in charge of his or her own destiny. Other times, an individual might be jaded or uninterested in his current field and opts to do something entirely different.
An executive who is burned out by commuting back and forth to work each day may want to find a business close to home. This is a logical choice. However, the location of a business may dictate its success. For instance, a restaurant near a college campus or on a street with lots of traffic and ample parking might be a further distance from home, but it will come with an established customer base.
For any entrepreneur who is switching industries, finding a partner with experience in the type of business can be critical. They may or may not have the ability to put up capital, but joining with someone who has experience in the industry can be a critical factor of success.
Work with an accountant to determine the business valuation of the company you want to buy. Determine whether the current owner will stay on and show you the ropes, and make the length of time he or she will remain. A smooth transition will help with the retention of existing customers. Once the valuation is made, the entrepreneur will know how much money is needed to buy the business. Then he or she can begin securing capital.
Sometimes a company is sold through seller financing in which the purchaser makes payments over time in order to buy the business. In other cases, buyers purchase businesses by using their own funds, along with money they borrow from family and friends. If neither of those options are available, aspiring entrepreneurs can apply for business acquisition loans. These loans are usually easier to obtain than startup loans because the lender can examine the company’s financial history.
In order to obtain funding, the buy must produce a letter of intent signed by the seller. Make sure that the document has be reviewed by an attorney. Then, the new owner must prepare documents for the loan package, including three years’ worth of tax returns, names of any partners, and a business plan.