Are you planning on buying a small or medium sized business in Melbourne? Acquisition funding may help you front the cash. Follow these simple tips to make sure you give yourself a strong chance of success.
Buying a business can be a lot of work – but often nowhere near as much work as building a business from the ground up. That’s the nice thing about purchasing a business that‘s already established. You avoid a lot of the usual problems business founders face. Some of these costly challenges can include:
- Having to ‘pivot’ or adjust your offering until you find something the market will pay for
- Working out the strategies to delight and surprise customers and still stay profitable
- The trial and error of marketing to establish your new brand in the marketplace
- Experimenting with systems to keep things running smoothly as you scale and grow
And that’s just a few of the many challenges that buying a ready-made business can help you avoid.
Of course, when you buy an existing business in Melbourne, you’re also buying its history, its track record, and importantly, its risk.
If you’re looking for acquisition funding, then understanding the level of risk in your prospective business is generally critical. But that’s only half of the risk assessment story.
In considering your application, lenders need to assess all risk associated with their investment. So, they’ll want to make a careful assessment of the business itself – and of you, the individual business owner.
Lenders must be cautious. It stops them running out of money to lend. So, they’ll do all they can to mitigate risk – or simply avoid it altogether. They’ll look at things like your debt to income ratio, and other personal factors to assess your own money management risk. Then they’ll measure the risk and the value of the business you’d like to acquire.
So, before you even talk to lenders, it’s important you assess the risk of any potential business acquisition in the same way your lenders will.
In this article, we’ll cover some of the more common acquisition funding options (and mention a few less common ones). We’ll address common eligibility requirements to obtain each option, and the process of doing so.
What is Acquisition Funding?
Acquisition funding or acquisition financing is generally multi-sourced capital, loaned for the purpose of purchasing an existing business. Acquisition financing structures can be complex. Like a small business plan, the right strategy can go a long way to helping you get the funding you need.
Acquisition funding gives you an immediate resource that you can use toward the transaction. Traditional loans or lines of credit can be viable acquisition funding options. Having said that, acquisition financing is different from other loans like a home loan or mortgage. That’s because it values intensive planning and projecting for the future of the small or medium sized business being bought.
Especially for smaller companies, acquisition financing rates can be quite favourable, offering an effective way to scale the newly purchased business.
However, there are other forms of acquisition funding you might also consider. Based on varying factors, these options may better suit you as a soon-to-be business owner. If you need personalised advice on choosing the right option for you, it can pay to come to us for a no-obligation consultation. Meanwhile, here’s a good overview to give you an idea of your options.
Alternative Acquisition Funding Options
You may notice in the following funding options that not a single option will necessarily provide 100% of the solution. Therefore, there are often multiple streams of acquisition funding, depending on the size of the business you’re buying.
Using Your Own Funds
You probably wouldn’t read this article if you had enough capital to buy a business outright. However, it is always the first option. Even if you secure funding elsewhere, you’ll likely have to invest a decent chunk of your own cash as the initial capital.
Depending on how the business has been valued by an expert, you may be able to personally fund more of the required investment than you think. Financing with your own funds can include retirement accounts, savings, or even home equity.
Using your own funds may seem ideal, but it isn’t as flexible as borrowing or collecting investments. Other sources of funding provide terms and agreements surrounding a repayment process. Always bear in mind that if you lose your cash outright, you’ll be left with nothing. So, it can be wise to share the risk and share the reward.
There are several kinds of loans that can finance your business purchase. Rates and amounts will vary.
A traditional bank loan or term loan from a bank can be challenging to obtain for business acquisitions. These loans are based on the value of fixed assets and not business plans. Nearly every bank offers these types of loans under the right circumstances.
Your loan eligibility will be determined by your personal assets, credit score, and other factors surrounding your financial history and not so much the history of the business being purchased.
If you’re able to put down at least 20%, maintain positive credit, and provide appropriate tax documentation, the Small Business Administration supports acquisition funding.
The SBA isn’t a lender but becomes a guarantor for those applying for business loans. Having the SBA on your side is beneficial and can nearly guarantee a business acquisition loan up to $5 million dollars.
To qualify, the SBA will look at your financial standing and business planning. You must have ample experience in the industry of the business you’re attempting to buy.
The process and eligibility of a secured loan are like the aforementioned funding options. The difference is that the assets of the business must be used as collateral.
Is the current owner willing to cut you a deal?
Vendor financing can be a flexible opportunity. Generally, in this case, the transaction agreement would come with a built-in loan and repayment plan with the previous business owner. Repayment will likely come from future profits of the acquired business.
A Few Other Options
Some other forms of acquisition funding include:
- Acquisition through equity
- Stock swap transaction
- Mezzanine and quasi-debt
- Leveraged buyout
The acquisition funding market is vast and diverse. The key to discovering the appropriate acquisition funding for your situation can be working with a lender who will tailor options to your individual circumstances.
How to Get Started
Serious about purchasing a Melbourne business? These are the preliminary steps that we help our clients to take before they even apply for funding.
1. Understand your personal credit score – and that of any potential partners.
2. Determine your net worth based on personal assets and liabilities.
3. Determine how much money you need exactly.
4. Have a ‘bona fide’ business plan that will impress investors – think Shark Tank!
5. Consider a repayment timeline. Based on the business’s projected profit, how long will it take you to repay your financing debt?
Here’s what a lender will likely look for in your acquisition funding application and pitch.
1. Experience. How much do you know about the industry and business you’re trying to buy? And how well can you demonstrate that awareness? You will quite literally have to pitch and sell a master business plan that helps lenders feel secure in funding you.
2. The Business Plan. If you’re going to pitch it, you’ll have to plan it. Though you may seek expert consultation in your business plan, be sure to have an in-depth understanding of what everything means and how to convey it. Even if you’re not a fan of the calculator or spreadsheet, numbers speak volumes. Nothing says “success-record” like numerical proof.
3. The Industry. Beyond your personal experience and the trends of the business you want to buy, investors will look carefully at the industry you’ll be entering. Is it inconsistent? Too risky? Understand where the weak spots lie and address how you will (or have) overcome them.
4. Work with People You Trust. Business isn’t always a ‘feel good’ experience. But at the very least, you must reserve the right of selecting lenders that believe in you and your mission.
5. Where Suitable, Get Strategic Investment. Some lenders or investors will have experience and insight into the industry your prospective business is in. That’s sometimes why they choose to invest in that industry. In some cases, they may be able to offer you more than just capital. Strategic investors can help with things like networking introductions, planning and strategy. And if they have ‘skin in the game’ they’ll often be inclined to help as much as they reasonably can. The flip side of that coin is they may want more of a say in how things are done, so you’ll need to weigh up the pros and cons of strategic investment.
Here at Epoch Financial, we’ve helped a range of acquisition funding applications to succeed. If you’re looking for advice and guidance to help you get the desired result, we could help. Get in touch and book your no-obligation consultation. We’ll explore your business financing options. We’ll make some recommendations tailored to you and let you know how we can help. Then it’s up to you whether you’d like to proceed.
This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.