Insights on Getting a Business Acquisition Loan.
So you have made the decision to leave your current position and want to go into an entrepreneurial direction, now what? First of all, decide whether you want to start up your own business, buy an existing one, or become a franchisee.
Taking over an existing company that is for sale may be the easiest way to go into business. You benefit from the previous owner’s learning curve and also do not have to incur the often high cost of purchasing a franchise, which can sometimes cost more than $1 million when all is said and done.
How do you find a business for sale?
As with any major purchase, it is important to do your research. Three ways to discover businesses that are up for sale include:
- Websites such as BizBuySell.com, the largest online database of businesses for sale.
- Business brokers. Brokers are hired and paid by sellers and can help identify companies that are for sale that might not might not be listed elsewhere.
- Friends, business owners or other contacts already in the industry you want to enter.
During the research portion of your journey, there is much critical information that you should find out. When buying a small business, there’s a lot of information to uncover. Here is a list of some of the most important questions to consider when buying an existing business:
- Do I have interest and experience to run a company in this industry?
- Why is this business for sale?
- How financially successful is this company? What have been the annual gross revenues for the past two years? What have been the annual profits (if any)?
- What is the local competitive landscape?
- How much is this business, and is it in my price range? How do you determine this price?
- How long is the current lease?
- What vendor contracts am I inheriting?
- What licenses or permits are required to run the business?
- Where can I secure financing for this business if I don’t have enough money already saved to purchase it?
Information can and should be obtained from the seller and/or his broker. Determine as best you can the customer loyalty of the business. Is the business running primarily because of the force of the current owner’s personality? Your job is to figure out if the business’s customer base will leave when he or she does. If the product or service is so good that it will stand on its own, the departure of the current owner may not impact the company’s future very much. However, if company revenue is a function of the current owner’s relationships and standing in the community, the risk is greater that the company could falter once he or she departs.
Additionally, talk to friends or acquaintances already in the industry. Utilize the local SBA Small Business Development Center, at which you can find counsel for free or at low cost on how to run a successful business.
With any negotiation, a seller will ask for a purchase price. Request to see the books for the past two years. The first thing to figure out is whether revenues and profits are trending upwards or downwards. If revenues are declining, is it because of the economy, increased competition in the marketplace, changes in the operation of the business or other factors?
If the firm is located in an area that has become gentrified and is on the rise, it may indeed be a good time to take over the business. However, if the local marketplace is saturated with companies in the same industry that you are going to enter or if the area is becoming economically depressed, perhaps you’ll want to reconsider the purchase.
Many times, a business goes up for sale as the owner prepares to retire and finds that no one in his or her family wants to take it over. If the company has become too much for the current owner to handle and if there truly is no succession plan, the buyer is in a stronger position to negotiate.
Securing a Business Acquisition Loan
The majority of aspiring entrepreneurs won’t have enough money to self-fund all of the startup costs related to purchasing a business. Sometimes the sale of a business involves some form of seller financing from the current owner. In such cases, the loan amount required from a bank is much less. This scenario also bodes well for the transition because the seller is vested in the continued success of the company (otherwise he or she won’t be paid back if the business folds).
Even when seller funding is involved, the individual buying the company typically need to secure a business acquisition loan. Once you have made the decision to move forward with the purchase, request the following documents from the seller:
- Last 3 years of the business’ tax returns
- Last 2 years and a current income statement and balance sheets
- Articles of incorporation, EIN tax number, etc.
- Existing contracts
- Building lease
- Licenses and permits
In order for a bank to make a lending decision, you will need to provide the following:
- Purchase agreement
- IRS Form 8594, which documents how assets are allocated during the purchase
- Bill of sale (transfers ownership of business assets)
- Bulk sale documents (inventory)
- Promissory notes.
- Commercial lease (if applicable)
- Consultation agreement (if the current owner staying on for a period of time to help with the transition)
- Non-compete agreement (if applicable)
Be sure to borrow enough money to provide a cushion for when the inevitable surprises occur. Since the equipment of an existing business is likely not brand new, you must consider the possibility that something expensive might need to be replaced. Further, all across the country local governments are voting to raise the minimum wage. In areas where it goes from less than $9 an hour to $12 to $15 per hour, the impact on your company’s bottom line may be significant. Having cash reserves on hand will help you weather these storms. If the excess capital is not required, you can always use it to start repaying the small business loan.
Becoming a business owner is exciting and challenging. Success in the future hinges on the due diligence that you put in before receiving the keys to the door. Understand why the business is being sold, whether it’s a succession issue of a thriving company or the current owner’s attempt to get off a sinking ship.
If you and your accountant and attorney determine that the venture is a good one, prepare for the ride. While every business will experience its ups and downs – particularly during the first year of operation – business ownership can be both lucrative and personally rewarding.