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Business Acquisition Loan Basics: What You Need to Know About Buying a Small Business

Posted by Celene Robert

April 22, 2022

For growth-minded entrepreneurs, starting a new business isn't the only way to own your own company. Acquiring an existing business, to grow your industry presence, expand into a new market, or bring a struggling company back to life, can be just as rewarding as launching a new venture—and comes with its own set of unique advantages.


If you're debating between launching a startup and buying an operational business, check out the 8 benefits of opting for an acquisition:



1. Acquisition allows you to skip past the startup phase

By acquiring an established business, you can reduce the time it takes to get your venture up and running—and generate a profit. Building a company from the ground up can take months or years. But because the purchaser of an existing business also receives the company's operating manuals, IT platforms, and other infrastructure, you have the potential to repair and scale the company quickly.

2. Acquiring an existing business can lead to faster expansion

While some startups can grow quickly, it's typically easier to expand on a proven business plan that's already running, because you don't have to know how to finance a business from scratch. A business with a track record can be easier to secure a business acquisition loan for, accelerating your time to profitability.

3. Existing businesses can generate faster cash flow

Existing businesses often have an established customer base. That built-in demand can help cover the cost of your business acquisition loan and allow you to draw a salary from the start, without having to wait for a new business to slowly expand.

4. Mature businesses have recognizable branding

Your brand is one of the most valuable assets you own, especially if it's already widely recognizable in your community. By acquiring an existing business, you can gain instant access to established products or services, advertising, contracts, employees, and awareness, which can all boost the value of your company.

5. A proven business can help you qualify for a small business acquisition loan

Financing a business purchase is often easier than securing funding for a startup, because the bank can see a history of profitability and growth. If you don't have the upfront capital to launch a new company, getting a business acquisition loan can be your smoothest path to ownership.

6. Existing businesses come with expertise

When you buy a company, you're not just acquiring the brand and customers. You gain access to that business's finance, legal, and HR professionals, too. Having the right team in place, a team that knows your company inside and out, can help you focus on the day-to-day activities required to run your business, instead of getting caught up in hiring, management, and process development.

7. If you already own a business, acquiring another business can expand your reach

A business acquisition can help your existing company easily enter a new market, diversify its product lines, or reach a new customer base. Rather than slowly expanding your company city by city, purchasing a locally recognized brand almost instantly increases your existing company's reach, revenue, market share, and growth potential.

8. Buying a business accelerates growth

An existing business's products or services are already market-tested and locally established. That puts you in position for quick sales and expedited growth. Especially if you already have highly trained staff and loyal suppliers in place.

Wondering how to finance a business purchase? Try one of these 4 paths

Financing a business purchase can happen in a few different ways, based on your creditworthiness, the business acquisition loan amount you need, and whether you meet the business acquisition loan requirements.

Here are the four main types of loans you can use for financing a business purchase:



Business Acquisition Loan Option #1: SBA Loans

The two Small Business Administration business acquisition loan types are the 7(a) and the 504. SBA small business acquisition loans are issued by participating lenders, such as banks and credit unions, and are partially guaranteed by the federal government. SBA loans also have flexible terms of up to 25 years, comparatively low business acquisition loan rates, and can be used for various types of acquisitions of up to $5 million for those who qualify. However, like traditional bank loans, the business acquisition loan requirements of SBA loans can be strict.

If you're considering financing a business purchase using an SBA loan, you can use a business acquisition loan calculator to determine your overall costs. While SBA loans can be one of the most affordable business acquisition loan options, depending on your circumstances, one of the following options may be more beneficial.

Business Acquisition Loan Option #2: Term Loans

Business owners and entrepreneurs may obtain a term loan through a bank or other traditional lender. Term loans provide borrowers with a set amount of funds, which must be repaid with fixed installments that include interest over a set period of time.

If you have a good credit score and meet the business acquisition loan requirements, you may qualify for a term loan with more attractive payment terms and a lower interest rate than other options. That can make term loans one of the best business acquisition loans for highly qualified buyers purchasing a profitable established business.

Business Acquisition Loan Option #3: Leveraged Buyouts

A leveraged buyout (LBO) entails acquiring a business using a large amount of borrowed funds. The acquired company’s assets are typically used as a form of collateral for the business acquisition loan, in addition to the acquiring firm’s assets. Thus, the major portion of the acquisition cost is paid out of debt.

The biggest advantages of an LBO are that it can offer an increased rate of return, minimizes the amount of your equity contribution, and can help make financing a business purchase realistic for small businesses aiming to purchase larger ones.

Business Acquisition Loan Option #4: Crowdfunding and Peer-to-Peer Lending

Crowdfunding and peer-to-peer (P2P) lending can also be used for financing a business purchase. It may be a good option if you are looking to acquire a business that you foresee as having great potential that hasn't been fully tapped into.

If you're unsure how to finance a business purchase using crowdfunding or P2P lending, you can start by researching third-party online intermediaries that connect lenders or investors with business buyers. Sometimes, the buyer of the business can also get funding from the seller rather than a financial institution.

Terms to consider when applying for a business acquisition loan

Some acquisition loans use the asset being acquired as collateral for the loan – this is especially helpful when your business doesn't have sufficient value to secure a loan with separate assets. In some instances, using equipment as collateral to secure a loan helps expedite the loan process. And, if you were to default, the lender would simply take ownership of the equipment.

Depending on your business, type of financing, and your business’s qualifications, the lender may require a down payment of 10% to 30% of the total transaction. Loan amounts, interest rates, and repayment terms vary from lender to lender and are based on your credit score. However, in some cases, the business you are buying can function as a form of collateral, especially if it has real estate or equipment. Before you start applying for a small business acquisition loan, it's a good idea to use a business acquisition loan calculator to estimate how much you'll need to spend to secure the funding you want.

Author

Celene Robert
Celene Robert

Celene heads up the marketing at Escalon. Passionate about helping companies grow their business, she spends her days finding new ways to bring essential business services to startups, SMBs, and growth-minded companies. Based in the PNW, she’s the proud owner of 8 pairs of Birkenstocks and a sassy, cuddly cat.

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