August 2, 2018 | Last Updated on: August 1, 2023
When you’ve decided to acquire a business, you want to know that you’ll be able to make the offer that will win the deal. Oftentimes, that means taking out a loan. Business owners should follow seven important steps when going to get a loan to buy their next business.
Just as with any other type of small business funding application, borrowers who want to be successful with a business acquisition loan must prepare in advance.
Beth Goldberg, Director of the New York District SBA Office, said that in addition to the seven steps outlined below, one of the first things entrepreneurs should do when applying for business acquisition funding is to put themselves in a lender’s shoes.
“The best advice I can give is to be totally prepared. That means reviewing your credit score, knowing the exact amount of money you need and how those funds will be used. Lenders want to know that they’ll be paid back and the best way to assure them of this is to tell them, in their own language, that you know what you’re doing and that you will be profitable.”
SBA 7(a) loans are commonly used to finance business acquisitions. Although the name implies it, SBA loans are not made directly by the Small Business Administration. Rather, the federal agency provides government-backed guarantees to banks and other lending institutions that help the lenders mitigate risk. At the same time, SBA loans enable borrowers who might not otherwise qualify for business acquisition loans to secure the funding they need.
Goldberg added that SBA’s Resource Partners –SCORE chapters, Small Business Development Centers, and Women’s Business Centers – can help business owners make sure the right boxes are checked.
Each year for the past several years, the SBA has continued to set records for the amount of loans that it backs. These loans are very popular with lenders and small business owners alike, making them one of the best ways to fund your business acquisition plans. Just as with any other type of small business funding application, borrowers who want to be successful must prepare in advance.
Beth Goldberg, Director of the New York District SBA Office, said that in addition to the seven points below, entrepreneurs should put themselves in a lender’s shoes whenever they’re thinking about applying for a small business loan.
“The best advice I can give is to be totally prepared. That means reviewing your credit score, knowing the exact amount of money you need and how those funds will be used. Lenders want to know that they’ll be paid back and the best way to assure them of this is to tell them, in their own language, that you know what you’re doing and that you will be profitable.”
In order to find success in securing loans to purchase a business, borrowers should have the following:
When seeking a loan to pay for a business acquisition, having a signed letter of intent to purchase is a requirement for just about any small business lender. The letter should outline the terms of the deal and a contingency clause that explains the purchase is contingent on the buyer’s ability to secure the funding required to buy the business.
Typically, in order to secure a small business loan, lenders will look for an individual owner (or members of a partnership if the business has multiple owners) to have credit scores of 650 or above. Naturally, the higher the credit score, the better chance the potential borrower has in securing financing. Those who have scores in the 750-850 range stand a good chance of getting a loan and are usually able to do so at a more attractive interest rate than someone who has a lower credit score. It’s a simple law of economics for the lender: the higher the risk, the higher the reward (in the form of increased interest rates charged).
The personal financial statement provides financial information about the borrower(s) involved in purchasing the business. In partnerships, everyone with 20% equity or more will be a guarantor of the loan, which means that all of those shareholders must provide this documentation.
Lenders want to know that you’ve been staying on top of all your obligations. When you apply for a loan, you’ll often be asked to produce your recent tax history. To be on the safe side, be ready to have three years’ worth of personal tax returns to show your lender. For borrowers who also own other companies, be prepared to provide returns filed by those companies as well.
Most lenders will want to see three years’ worth of financial documents – Profit & Loss Statements, Balance Sheets, and Cash Flow Statements – from the company that is being acquired. Lenders will use these documents to assess the viability of the business being acquired. Remember, their main concern is whether or not the loan will be repaid. If the target company has lost money for the past three years, securing the financing to purchase it will be much more challenging. You’ll have to explain in great detail how you’re going to be able to turn the business around.
Lenders want to make sure that borrowers are serious about the business. One way to prove it is by investing your own money into the venture. After all, if you’re running the business and aren’t willing to put up your own money, why would a lender want to? Some banks will look for a minimum owner contribution of 10 percent as a down payment. Others prefer 20 percent. A higher percentage is an indication that you are willing to put “skin in the game” and conveys that you are committed to making the business succeed.
A well-written business plan can make the difference between being approved and being declined by a lender. It should include:
The goal of a business plan is provide a blueprint for the success of a business. It conveys to potential funders the path that you will take and how quickly you plan to get there. A business plan should not be a “one and done” document, either. Make sure you’re sharing the latest version you have with your lender so they can see the recent challenges and opportunities your business faces.
Related: How to Get a Loan for Business Acquisition
When you’ve crossed those seven steps off your to-do list, you should be ready to start the application for your new business acquisition loan. Bring that knowledge with you when you go to apply, and you’ll be setting yourself up for success.
