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Accounting

How do you finance the purchase of a business

Most business purchase transactions are completed with one or more options. Buying an existing business can be very convenient in diverse ways, as compared to starting a business from scratch. The following options are the most common ways to finance a business acquisition;

Use Your Own Funds

Perhaps the simplest way to acquire the finance of a new business is to use your own funds. You can use your personal savings, retirement account or funds, and Home equity, for instance, to acquire new business. In most cases, most people will use part of their own money, plus a secondary financing option.

The Seller Financing

You can also finance the purchase of a business by asking the seller to provide the acquisition financing. In this case, the seller will provide you with an amortized loan for a period of time and you will repay the loan back from the profits generated through the business. Seller financing is more convenient than most conventional loans and it is quite flexible. These are the reasons why most people prefer it.  When handled properly, seller financing could be the most convenient way to purchase a business, because you may not have to invest any funds and you will get a share of the business profits, if the business is properly managed.

The Bank Term Loan

The bank loan is one of the commonest conventional loans for business acquisition. This loan is normally provided by a commercial bank but the rules and guidelines of this type of loan make it extremely difficult to obtain. Banks will normally offer funds for business acquisition based on existing business assets and not against your business proposals or plans. In order to qualify for a bank loan, you must have valuable assets and great personal credit plus a solid track record in the industry the business operates.

The Leveraged Buyout

The leveraged buyout finance option is another top choice for small-scale business owners. This option allows business buyers to maximize the return on the business by minimizing the cash they invest while leveraging on their assets. This means that the buyer invests mostly assets and lesser cash. Leveraging on your asset may come with high risk, especially when things don’t go as planned.  The principle behind this option is simple, you leverage on your business assets such as real estate, equipment or inventory, just to finance your business acquisition.

No-Money-Down Options

It is possible for an entrepreneur to acquire a business through a No-money-down option. Though this option is quite scarce but could be the most suitable option for those who have little or no cash to acquire a business. Basically, the buyer will lookout for 100% seller funding or external source of finance, and in return, the funding provider will have a major stake in the business hence they get a larger share of the profit.  You will have to appear desperate to get this type of funds because the financiers want to fund only entrepreneurs who can prove they will be successful with the business. This option can be pretty difficult for a business buyer who is new to the business, hence it is better to put some money down.

The Commercial Mortgage Loan to Buy Business

You can also take a commercial mortgage loan in the United Kingdom to finance part of your business acquisition. This type of loan is mostly used in procuring business premises in the UK or it can be used as part of a funding package to buy a new or existing business outrightly. Lenders will normally use the property you are buying as the collateral for the loan and you should expect an advance of up to 70% of the value of such business.

Unlike what obtains in residential mortgages, most commercial mortgages do not have pre-set interest rates, the lenders will have to examine your application and then set the interest rates according to the risks they consider your business acquisition presents. Please take note. The commercial mortgage loan must be strictly used for business acquisition only, failure to comply with this can attract a penalty fee.

The Assumption of Debt

Assumption of debt is a type of business acquisition funding where you can purchase the asset of the business or the stock. If you buy the assets of the business you will buy the majority of the business without the liabilities such as future lawsuits. If you buy the stock of the business, on the other hand, you will surely buy the assets alongside the liabilities and risks.

It is important to be aware of these points because part of the payment to the seller may be used to cover some existing business debts. The Assumption of debt option for business acquisition can be complicated and it is not advisable for first-time business buyers.

Conclusion

A business purchase does not end with the outright payment of the business. As a buyer, you need to keep some extra costs in mind. You need to pay attention to the closing costs of the business acquisition deal and the best possible way to purchase and then finance a business operation is to have a cash reserve.  Having a cash reserve to finance your business operations will sustain your business survival pending the time you start to generate profit from the business. You can also improve your cash reserves by having an agreement with your business suppliers to pay them every 30 or 60 days, instead of making immediate payments.

Getting financing to acquire a business will surely increase your closing cost and this cost will include the contributions you made to the purchase of the business The amount of money you will need to set aside for the closing costs of the deal will depend on the size and the type of business you are interested in acquiring. Financial experts suggest that you should budget a minimum of 10% of the business purchase price, for the closing costs, though, up to 20% should be better.  Just like any other business venture, you need to guidance of a financial expert before you choose any business acquisition financing option.

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