What do Google, Yahoo and Microsoft all have in common (despite being three of the biggest and most recognisable tech companies)? They all have a healthy practice of business acquisition; they know that buying a business is often cheaper than building one from scratch. Business acquisition loans can help you do the same.
There are plenty of factors motivating the purchase of an additional business, including the opportunity to enter emerging markets, increase market share, open up new geographic areas and build on your brand. But there are also compelling reasons why, if you don’t have a business it can be a good idea to buy one rather than start-up.
Why buy a business instead of starting-up?
Buying a new business can be a much easier route into becoming your own boss than going through the pain of starting from the the ground up. But make sure you do it properly.
Finance is easier – Lenders are more likely to offer you a business loan for the purchase of an already established business rather than fund a start-up. There is often less risk involved in acquiring a business. So long as it is proven to generate income.
Ready-made customer-base – An established business already has customers and customers mean income-streams. Start-ups have to generate interest and customers and a lot of effort and energy is spent on doing this. Having existing and immediate sales mean that a lender can be more confident of a return on its investment.
Growth opportunities – Because the business infrastructure is already in place it means there won’t be a big outlay of investment going into purchasing stock and hiring employees. This means that funding goes directly into growing the business and making it more profitable.
Supply network – An existing business will also have an established network of suppliers and contacts. A lot of time can be spent in getting the right kind of supply-chain in place and having one already in place means hitting the ground ready to trade. It also means you have the opportunity to renegotiate more favourable terms.
What is a business acquisition loan?
This is a loan you can use for buying an existing business. You can use this loan specifically for the acquisition and funding of a new business, either new or separate to your own. The amount of finance you can get depends on the type of business you are buying and the plans you have for it.
While there isn’t a single-product called a ‘business acquisition loan’, when you apply for a loan which is to be used to purchase a business that’s exactly what it’ll become. And business loans are the preferred vehicle for this.
What’s Your Business Plan?
Before you approach a lender you need to have done your due diligence as well as thought out how you are going to run the business effectively. Having a business plan in place will help not only your loan application, but also make it easier to implement your strategy for the business.
Your plan needs to cover as much as possible and include what you will do differently in order to make it more profitable. How will you ensure the long-term success?
Business Analysis – You should be able to describe precisely the nature of the business you want to purchase including its service model, location, geographic reach, attributes, financials and its mission statement.
Market Analysis – Just as important is the market analysis, an assessment of the business’s marketplace, its competition, customers and the assets it holds.
Marketing Plan – Identify and explain what your target markets are and how you are going to reach them. How do your products or services benefit your target market.
Legal – Who will own the business and what is the financial history of any directors or shareholders?
Your business acumen – Key to your plan is the experience you have within the industry. How are the skills you have able to advance the business you want to purchase? This should also include your specific skills, contacts, expertise in the industry.
In short you are looking to determine the current and potential value of your target acquisition highlighting:
* The projected performance and financial objectives.
* The investment you are willing to put in and the current risk exposure to shareholders, directors and investors.
How To Approach a Lender for a Business Acquisition Loan
Buying a business can be a lengthy process, there are a lot of variables to consider and evaluate; is the business profitable, is the industry in a state of expansion or contraction? But once established, getting a business loan can often be relatively quick and painless – so long as you have done your homework!
To get a business loan for your business acquisition you will need to have thought about your business plan, your funding strategy and what the future holds.
Lenders like to see that you have a clear business proposition both short and long-term:
The vendor’s exit plan – If the owner of the business you want to buy from doesn’t have a clear exit plan, it can make your takeover more difficult than it needs to be. Ensure that both you and they are clear on their roles. This can mean taking on their services for a short time in a consultative position or ensuring that they have passed on key details like contracts and a pension plans. Get this right and you can start on a solid foundation.
The business offering – Establish the current business offering and identify where and how this can be improved; what expertise can you bring to the business? Demonstrating a plan identifying your business proposals and improvements will help the lender generate confidence that you are able to give them a return on their funding.
Investment – Buying a business won’t be the only investment you should be looking to make. Have you created a forward-looking plan for the business that takes you beyond initial business acquisition loans? What future investment might be needed and when will you need it? Lenders like to see well-researched industry projections. If they are willing to lend to you now, they might well want to offer you further funding in the future.
Diversify revenue streams – The business’s present client base won’t necessarily represent the available scope of the business. There can be more than one area in which to extend the business offering and product or incorporate new customers. There are always alternative target markets that you can aim the business at, through either marketing or promotion.
Expansion strategy – Demonstrating the steps needed to hit growth targets is a compelling argument for most lenders. They like to see realistic figures; sales, product lines, number of customers, price points and timescales. These will indicate that you have a clear understanding of the numbers needed to achieve growth and where future growth areas are located. An expansion strategy will take into consideration the business offering, customer base, revenue streams and the investment needed.
How Lenders Evaluate the Business You Want to Buy
With a traditional loan the lender will evaluate you when deciding how much to lend to you. But when your business loan is for business acquisition they will be evaluating not only your financials but also those of the business you are purchasing (as well as the bit in the middle – how your experience will develop the business and what plans you have for it.)
This can make the decision a lot harder for lenders but the key elements are still:
Balance Sheet – A lender will review the business, identifying what assets it holds and what its liabilities or outstanding debts are. This helps the lender establish the purchase price as well as identifying potential assets it can take in the event of default. The more business assets that are identified the less likely you are to be required to offer up additional security.
Filed Accounts – As with any loan, lenders want to see an appropriate number of years of filed accounts.
Profit & Loss – The lender will review balance sheets, income and other financial data to establish the profitability of the business you want to acquire. The less profitable the company is, the riskier the acquisition will be considered.
The process of using a business acquisition loans to purchase a new business might seem long, but it is a process that will ultimately give your application the best chance of success to help you achieve employment independence to become your own boss.
Choosing to buy an existing business is a decision that will affect your entire life and the employees you are taking on, but with hard work and the help of a lender who believes in you, you can turn your business into a successful future.
If you are considering purchasing a new business or are considering a partnership buyout then contact us today to learn more about the financial packages available.