One of the most popular ways to become a business owner is to acquire an existing business. There are many advantages to acquiring an existing business which I will highlight below.
Is Buying The Best Option
But first, it’s worth saying that prior to acquiring a business you should conduct a financial analysis to determine how quickly you would be able to match or exceed revenue and profitability starting from scratch.
If you can start new with less capital and ramp up revenue and profitability within two years, it’s likely best to forego acquiring an existing business and start fresh.
Alright, now let’s review the many advantages of acquiring an existing business.
Buying an existing business means you’ll start with the following:
- An existing customer base
- Revenue stream
- A recognizable Brand
- Leased office space
- Furniture, fixtures and equipment etc.
Ironically these can all be disadvantages as well, which is why it’s important to conduct due diligence prior to waiving the financing contingency.
Options To Raise Capital
Once you determine that acquiring a business is preferred to starting up you’ll need to raise capital. There are basically three ways to raise capital; self fund from cash reserves, align yourself with equity partners or apply for debt.
Most entrepreneurs don’t have a cool mil in the bank so they’ll need to pursue either equity or debt. There is a time and place for both but debt is the best choice in most cases.
Debt is cheaper, allows the borrower to retain 100% company ownership and once the loan is paid in full it’s gone forever. On the other hand equity partners own a percentage of the company, will want to participate in decision making, will drain cash flow and will never go away until they’re paid in full for their investment.
The Right Loan, The Right Lender
For those who choose to pursue debt, they’re now faced with the daunting task of finding the right lender that will offer them the best rates and terms for which they qualify.
The first challenge, however, is that most borrowers seeking a commercial loan don’t know what they qualify for never mind which lender is the right choice.
So now cutting to the chase, I can confidently say that most people will not qualify for conventional financing to acquire a business. The minimum liquidity, net worth and real estate thresholds are simply too high.
On the other hand, SBA 7a financing is perfectly suited to help most entrepreneurs obtain capital to acquire a business for the following ten reasons.
- SBA loan rates are competitive with conventional options
- The minimum capital injection is 10% instead of up to 25%
- The seller may contribute up to 5% of your 10% minimum capital injection
- SBA guarantee fees may be financed instead of paid out of pocket preserving operating capital
- The loan is amortized over a 10 year period lowering monthly payments to increase cash flow right from the start
- There is no prepayment penalty so pay as much as you want as often as you want
- There are no financial covenants or burdensome annual documentation review requirements
- Typically you’ll be able to choose your depository bank instead of being required to bank with the lender who approves your loan
- When the business and real estate are both for sale, there is the ability to combine the business acquisition with real purchase into one loan amortized up to 25 years
- And may I say the best reason, is that you get to work with ThinkSBA who lives and breathes to help individuals achieve their personal and professional goals through entrepreneurship