Business Acquisition

Business Purchase

Are you looking for financing to purchase a business? Here are a few items to go over that most lenders will look at. 

Experience: Lenders are more likely to lend to you if you have business ownership experience in that specific industry or relatable business ownership experience. You have to prove to the bank that once you take over the business you are buying that you are going to be successful!

Cashflow: The bank will want to see the sellers last 3 years business tax returns and their most recent profit and loss statement along with your personal financial statement (add link for personal financial statement) in order for them to give them an idea on whether or not your business purchase throws off enough cashflow. Usually banks looks for the cashflow debt coverage to be 1.25 or higher. If you need help understanding this call the Guru for more info!

Credit: Banks usually want to see credit at 660 or above. Anything less than that be prepared to explain why it is low and explain any historical delinquencies on your credit report.

What does an Acquisition consist of?

A basic acquisition will consist of usually one company and or person(s) buying one or more Companies. Distinguish if the business purchase is an Asset Purchase or Stock Purchase.

In a stock purchase you buy the selling entity itself as well as take responsibility for all liability of the company along with the name you are buying unless otherwise specified in the purchase agreement.

In regards to an Asset Purchase the buyer would be buying only the assets of the business tangible and intangible, creating their own entity to hold the assets and wouldn’t have nearly as much successor liability (this is the most common acquisition we see.)

The down payment requirements on the business purchase scenarios above are:

10-20% down is typical with 10% down being the minimal amount required by SBA. You may be able to get away with less then 10% down if cashflow and debt coverage allows however this is a rare situation and some further requirements apply.

A seller carry note can be used in a business acquisition but should be on top of the minimum 10% down that the borrower/buyer will need to put down. 

All in all the your loan will have a better chance of getting approved if you have 10- 20 percent down from the borrowers own funds or a mixture of borrowers funds and seller carry note. The closer to 20% down the better since banks like to see that you have skin in the game along side them.

Sellers can stay on as an employee and or have a consulting agreement in place for no longer than one year to assist in the overall transition of the business. A non-compete agreement is usually always necessary between buyer and seller to make sure that the seller doesn’t open a similar business and take away all of the original customers hindering our borrower in regards to being able to repay their loan.