Perhaps the biggest challenge a business owner will face when acquiring another company is coming up with the money to make the purchase. Links Financial leads the way in the Tampa Bay area when it comes to business acquisition financing. We are diversified in experience and well-positioned in the local market, which enables us to work out creative financings that other banks and private equity firms cannot. Contact us today to learn more about financing a business purchase.
Likely Capital & Business Purchase Financing Options
Below are six of the most common options for financing a business purchase ranked from the cheapest to the most expensive.
Most businesses were started with a personal credit card or the home equity in a person’s house. Oftentimes the first investors were family members and friends who gave personal loans to help get the business off the ground. While this is a common – and effective – way to start a business, it may be a tricky way to continue its growth depending on the dynamics of your relationships.
SBA Guaranteed Loans
Contrary to popular belief, SBA Loans do not come from the SBA but from commercial banks or other non-traditional lenders that provide SBA financing. Many lenders welcome SBA loans because of the fees associated with the loans themselves, so it could be a quick and easy way to finance a business purchase. However, if you do choose to get business acquisition financing through an SBA loan, know that you are all in! You will be personally guaranteeing the debt, your house will typically be pledged, and an assignment of your life insurance policy will be given toward the loan.
Bank Loans & Personal Lenders
When it comes to banks and lenders, you are still getting an inexpensive form of capital. With these lenders, the purpose of the loan will drive the type of business acquisition financing that you receive. Commercial banks favor lines of credit and owner-occupied real estate due to their ease and security. When it comes to financing a business purchase, though, banks tend to shy away from the “air ball” component of the loan, or the part of the loan that cannot be backed by tangible assets. However, private lenders prefer business acquisition financing because they understand the synergies and see the opportunity for growth.
Your competitive landscape, vendors and other third parties in or that work closely with your industry represent fertile ground when it comes to finding the right company to acquire. This type of strategy has proven to be extremely successful for our clients. For example, one Links Financial client who owned surgery centers started acquiring other practices that offered complementary services to what his offices specialized in, therefore expanding the offerings of his business. The efficiency and scalability of this model increased revenue five-fold and created a successful business that he could sell for millions more than he invested.
Private Equity & Family Offices
This is the most expensive way to fund a merger or acquisition. Private equity firms focus solely on the numbers – if the numbers paint a profitable picture, they are willing to invest. Based on 35+ years of experience, we know that numbers on paper are only a piece of the picture and that the numbers that look best to an investor don’t always translate into what is best and most profitable for the business itself. Additionally, private equity firms are looking for $5 million or more in annual cash flow and tend to pay less than what a strategic investor would for the company.
Family offices have traditionally been one of the players working with private equity firms, but they are starting to break away and lend directly to business owners. That being said, financing a business purchase through a family office could be slower and less stable than other means of capital. When business owners do get a chance to work with the founder of a family office, though, there is value in the founder’s experience of how to successfully grow a business.
Navigating the Maze of Business Acquisition Financing
In addition to a traditional business purchase loan from a bank and conventional asset-based or seller financing, capital is available through alternative sources such as insurance companies, pension plans, angel investors and venture capitalists. Because each capital source has its own model for funding acquisitions, sorting through and tracking these criteria can be time-consuming and expensive. Depending upon characteristics like cash flow, perceived risk, type of collateral offered, growth strategies and asset valuation, a business acquisition may entail more than one funding source.
Working on behalf of our clients, we evaluate these factors and create a financing structure that enables our clients to complete a successful transaction. Up-to-date on local and regional market conditions and with a passion to help our clients succeed, our team of experts will steer you through the labyrinth of business purchase loans and debt financing strategies available, saving you valuable time and expense. Contact us today about funding mergers and acquisitions.