Financing an Acquisition

Mike Ginsberg

Interest rates are low, the economy is growing, business is great and you want to make your first acquisition. What’s more, you’ve already identified the perfect add-on opportunity to support the expansion of your current business. However, you don’t like the idea of tying up all of your working capital in a new business endeavor and you still may not have enough cash on hand to make an acquisition outright.

Fortunately, financing options are available if you know how to take advantage of the resources available to you and you’re willing to jump through a few hoops.

There are three main options available when financing your business acquisition. First, you could take out a home equity line of credit. Unfortunately, it doesn’t amount to too much money, takes away equity from your home and may not even be an option given the current housing market. Second, you could take out an SBA-backed loan through a bank or private channels, like friends and family. Third, you could embrace the idea of equity financing, which involves investors or business partners who own a portion of your business.

In today’s business environment, the second and third options tend to be the best for those looking to acquire a business. However, if you are going this route, there are six key preparations you need to make before moving forward.

1. Prepare a formal business plan – Ideas are great, but at a bank nobody cares how great if you don’t put pen to paper and identify how your business will turn a profit, thereby repaying your financial obligations.
2. Prepare to sell yourself – Regardless of your audience – friends, family, or the SBA – you need to convince them that your idea is great, your business plan is sound, and you have the skills needed to succeed.
3. Prepare for background checks – If you need financing, you better have a solid credit rating. Like credit card companies, a business lender needs to know that you are responsible and can handle a sizable loan. Make sure you’ve paid off any outstanding credit card statements, speeding tickets or cable bills. It could come back to haunt you.
4. Prepare your prequalification of financing – Just like buying a home, you need to get prequalified to buy a business if you are financing the acquisition through debt. This process can be intensive, but it is well worth the effort since it is the same process you will have to go through with all lenders. Like a mortgage, you want to get multiple quotes to get the best financing option available.
5. Prepare to be asked to supply collateral – Lenders want to know they are secure in their investments, especially something as risky as a new business. You will likely have to show that there is value in your current business, home, accounts or some other asset for the lender to finance your loan. Fortunately, an existing business holds inherent value, since there is already equipment, supplies and receivables to help offset the collateral requirements.
6. Prepare to make a down payment – No, this is a mortgage. But like a mortgage, sellers and lenders want to see that you are serious by receiving some cash up front. The amount of money you put down to buy a business will range anywhere from 10-50%, depending on how much money you have available or how much collateral the lender will accept.

When this process is all said and done, you may feel like you were just grabbed by the heels, flipped upside down and shaken for all your worth. That being said, if owning your own business or growing your business through acquisitions is something you are serious about, then this process is well worth it.

Kaulkin Ginsberg’s specialty is in outsourced business services, but we have deep roots to the DC region and we’re very familiar with ARM company transactions. Feel free to contact us at hq@kaulkin.com if you are ready to take that next step and acquire your first business.