How to Secure Finance to Purchase an Existing Business

by Mark Collins 12th of July, 2024

How to Secure Finance to Purchase an Existing Business

Unlike starting a new venture from scratch, buying an existing business offers immediate access to an established customer base, a proven business model, and ongoing revenue streams. However, securing the necessary financing can be a complex process.

Here’s a comprehensive guide to help you navigate the financial landscape and obtain the funds you need to acquire an existing business.

Understanding The Finance Options

There are several financing options available, each with its own set of advantages and requirements. Understanding these options is crucial to choosing the right combination of finance methods for your needs.

1. Bank Finance

Traditional bank loans are a common financing option. But not all banks are created equal in the business lending space. Some want full security either from property or cash, whilst others are happy to take the business as security.

2. Seller Financing

Sometimes called vendor financing, this is when the seller agrees to finance part of the purchase price. This arrangement can be beneficial as it often involves more flexible terms and conditions. It also indicates that the seller has confidence in the business's continued success.

3. Earn Out

This is where the seller agrees to take a portion of the payment over an extended period of time, usually a few months to a few years. This is normally dependant on the business making the same amount of profit or more. A common method when you want the current owner to stick around for a longer handover.

4. Private Investors

Private investors, such as venture capitalists or angel investors, can provide the necessary funds in exchange for equity or a share of future profits. This option can be advantageous if you’re looking for significant capital without incurring debt, but it means sharing control of the business.

5. Personal Savings and Asset

Using personal savings or assets to finance the purchase is another option. While this approach minimises debt, it also involves significant personal financial risk. It may be a better option to hold onto your cash reserves for future unknowns or growth opportunities.

Preparing for the Finance Process

Securing business lending requires thorough preparation. Here are the key steps to ensure you’ve got the best shot at approval.

1. Conduct Due Diligence

Before seeking financing, perform comprehensive due diligence on the target business. This includes reviewing financial statements, understanding
the business model, assessing the market position, and identifying potential risks. A clear understanding of the business will not only help you make an informed decision but also strengthens your finance application.

2. Develop a Business Plan

A detailed business plan is crucial for convincing lenders or investors to lend you the money. It should include an executive summary, business description, market analysis, organisational structure, and financial projections. Highlight how you plan to grow the business and ensure profitability.

3. Assess Your Financial Situation

Evaluate your credit score, personal assets, and existing liabilities. A strong personal financial position enhances your credibility and increases your chances of securing financing.

4. Prepare Necessary Documentation

Lenders and investors will require various documents, including tax returns, financial statements, bank statements, and legal documents related to the business, such as lease agreements and contracts etc. Having these documents ready to go can expedite the application process.

Summary

Get a great commercial broker on your side (like us). We will help you navigate each of these steps, from structuring the terms, to collecting and analysing the necessary documents. Reach out for a complimentary 15 min chat to discuss your finance options to secure your dream business.

Tags: buying finance small business