An Entrepreneur’s Guide to Business Acquisition Financing
When you have the knowledge and network connections to get things done, acquiring a business can be a good way to take an idea from concept to success. Business acquisition financing provides entrepreneurs like yourself with a way to acquire bigger and higher value businesses. Here are some of the most common financing options.
Banks often have strict requirements for who qualifies for financing. This is because banks prefer to make low-risk transactions and eliminate people and companies they fear may be unable to make timely payments. However, it is important to note that not all banks have the same requirements. Being turned down at one bank doesn’t mean you cross banks off as a potential source for financing. Do some research and see if any banks have financed the kind of acquisition you’re planning because they are more likely to approve your loan.
If you are dealing with a lot of collateral, low cash flow and the ability to handle high interest rates, then asset-based business acquisition financing may be what you need. Most lenders look to cash flow for qualifying a business acquisition, but asset-based financing is on the rise. While this kind of financing is competitive among lenders, the interest rates still tend to be between 12% and 28%.
This kind of financing allows you to trade debt for equity. Instead of having a large debt associated with the financing, you give up equity in the business you are acquiring. The lenders who offer this kind of financing include equity firms, venture capitalists and angel investors. Most equity firms focus on middle market companies with $10 million in revenues or more. They also expect a return rate of about 25% and may require you to forsake a 51% majority stake in the business. The timeline on this kind of business acquisition financing is expected to be three to seven years for selling the business of or taking it public.
For a middle-of-the-road option, there is mezzanine financing. This involves a small amount of debt and a smaller loss in equity. Some lenders take a 20% stake in the business and provide financing to cover the rest of the deal. If either the debt or equity option is too extreme, this can be a good place to start instead.
Business acquisition financing comes in many forms. When you’re an entrepreneur looking to breaking into a new market, financing allows you more buying power than you might have on your own.