Is a Company Acquisition Strategy Right for All Entrepreneurs?
Starting and growing a company is a lifelong dream for many people, but it’s also one that can cause a lot of fear and anxiety. Financing business growth can be difficult. The amount of time, money, and personal sacrifice required to build a business from scratch may put the dream out of reach for most. Thankfully, owning a business doesn’t always require building it from the ground up, and the number of ways to buy or acquire an existing company are growing faster than ever before.
Buying an already-profitable running business can help jumpstart the entrepreneurship dream for someone who is short on time, patience, or risk tolerance. But the process isn’t always straightforward, and it certainly isn’t cheap.
This all raises a question: How can someone who isn’t already independently wealthy or well-connected purchase an existing business? How can the deal be financed and what are the risks involved? In this article, we’ll answer a few of these questions and focus on the best ways to finance a company acquisition.
Company Acquisition: Why Buy?
There are many reasons why an aspiring small business owner might decide to buy a company instead of starting one from scratch. Some of the biggest ones are:
- Time: The length of time between deciding to start a business and actually getting that operation up and running can be very long. Many people don’t realize that a new business involves several steps and a long planning process before opening the doors on a new operation. Depending on the type of business being created, the timeline can include a licensing application, business name/owner registration, finding a facility and equipment, hiring staff, training, advertising, and more. Finally, most businesses don’t just get started and become successful out of the gate. There’s always some lag time between a new business opening its doors and potential customers hearing about it.
- Money: Time is money, right? This is certainly true when starting a business, more so because the vast majority of new operations don’t open their doors to a profitable stream of customers. It will take time to start generating any revenue at all, much less becoming profitable. Money is also one of the biggest challenges when it comes to starting a company from scratch because there are considerable expenses involved in obtaining licenses, paying legal or administrative fees, renting or buying a new facility, hiring and training staff, and so on. An existing business lets you bypass all these painful, cost-intensive tasks.
- Difficulty and Risk: Starting a business is not only slow and expensive, it can be extremely difficult and can involve a ton of work for the prospective owner. In some industries, just getting a new operator’s license is a monumental task and can make starting a new business nearly impossible.
A great example is the difficulty of obtaining an alcohol license to start a new restaurant or bar, which can be very hard because of antiquated laws or limits on the number of new licenses issued by the government. Similarly, any business that intends to import or export goods from foreign countries may have difficulties in both locating the items they need and then getting those items through customs into the country. All these factors make starting from scratch very risky.
How to Acquire an Existing Company
Funding a business acquisition can be every bit as difficult as funding a startup. Fortunately, there are several financial products and processes designed specifically to facilitate the process.
Loan – Loans are one of the most common and widely available financial products to fund a business acquisition. Banks, some credit unions, online lenders, and other non-bank lenders offer business loans to purchase an existing operation. The source and type of loan will depend on several factors, including loan amount, geographical location, the financial history of the potential owner, and the industry that the business operates in.
Since banks are bound by local and federal regulations, they may have a more lengthy and difficult application and approval process. Their credit approval criteria may vary, but almost always includes a component that focuses deeply on the individual credit of the person that will own the business. Past credit troubles or a history of unpaid bills will negatively impact the potential owner’s ability to get the loan.
Banks may also be limited in the amount they lend because of industry-specific concentration policies. This means that the bank may have a predetermined cap on how much money they’re willing to invest in a certain industry.
Online and non-bank lenders are mostly free of the limitations that are placed on banks, in terms of how much and where they can lend. In many cases, these lenders can approve loans for business owners that may not be able to meet the stringent credit requirements of a bank or credit union.
Non-bank lenders are funded by investors and other organizations, so they are free to set their own requirements, but in some cases, they may be a more expensive option because of their more relaxed approval requirements.
Investment – Funding a business acquisition may involve pursuing an outside investor. Separate from a loan, the investor will inject funding to assist in the acquisition when the prospective business owner can’t obtain a traditional loan or determines that a loan is too expensive.
The new business owner may also decide that finding an investor with industry-specific knowledge will be a good way to help ensure the continued success of the newly-purchased operation. Of course, an equity investor like this will have part ownership of the business that’s acquired, so aspiring business owners should pay attention to the impact this can have on their plans.
Company Acquisition: The Risks
Buying a business that has already been in operation doesn’t guarantee that it will be successful. The business for sale may also have had a rocky past that needs deeper investigation. That’s a long way of saying that there are considerable risks and a lengthy research/due diligence process is required to ensure that the business being purchased won’t sink the new owner financially.
Knowing why a business is for sale is as important as knowing the history and condition of the business’ operations. Acquiring a business that is failing or that is being sold because the previous owner couldn’t manage it may present significant challenges to the new owner.
Banks, independent lenders, and investors will want to know that the money they’re giving the new owner won’t be lost to a poorly run business. They will also want to confirm that the business being purchased is legitimate and not involved in any dispute or conflict that could cause it to shut down or lose money.
Prospective buyers will need to obtain significant documentation and perform thorough research on tax documents, employment records, real estate histories, and business profit and loss statements to ensure that they are acquiring a business that has been run successfully.
Choosing a business acquisition over starting a new operation can be a rewarding and potentially very lucrative option, but the upside doesn’t come without risk. Thankfully, there are many financial products, advisory programs, and other means of assistance available for anyone considering this path.
With enough research and a strong support network in place, a company acquisition can be a fast-track way to become an entrepreneur and realize the dream of business ownership.