3 minute read

The Financing Benefits When Purchasing an Established Business

For business owners and entrepreneurs looking to exit their current employment or invest in a business for an additional income stream, buying an established business offers many benefits. In addition to acquiring a proven business model, established customer base, and reliable revenue streams, purchasing an existing business often provides favorable finance terms from loan providers. While it may make sense in specific industries to start a business, the benefits of purchasing an established business, along with the security it provides to a new business owner, make a strong case for searching for a company to acquire.

The Advantages of Buying an Existing Business

Established companies typically have the following positive attributes:

• Existing customer base
• Established supplier channels
• Brand recognition
• Established market share
• Sustainable and predictable cash flow
• Employees that generally transfer with the sale
• Established reputation
• Seller consulting period (up to 12 months post-closing)
• Ability to start earning an owner's salary from day one

In addition to the above benefits, if financing is needed, a lender will typically be willing to lend more for a borrower to acquire an established business than to start up a business, typically at a more favorable interest rate. The SBA allows a lender to finance up to 90% of total project costs to acquire a business. While SBA policy also allows 90% financing on start-ups, most lenders will require more equity from the borrower ranging from 20% to sometimes 30% of the project costs. Additionally, some lenders shy away from financing start-ups altogether, so your lender pool will be much smaller when seeking start-up financing.

How To Find the Right Business to Buy

There are resources available to search for listings, one of the largest being BizBuySell. Engaging the help of a business broker in the market you wish to purchase a business is also helpful. A reputable broker or M&A advisor will often have access to off-market listings and a good pulse on available inventory on the market. Buyers should prepare to provide a list of their search criteria, including but not limited to industry type, revenue size, EBITDA, location, sale price, etc.

If you are considering purchasing a business, it is never too soon to start building your team of trusted advisors and lenders. A deal team should ideally consist of the following:

• M&A advisor/broker
• CPA for financial due diligence and structuring of legal entities for tax purposes
• Banker, if financing is needed
• An attorney with business acquisition experience

Lastly, if you purchase a business and utilize bank financing, the bank will engage a third-party valuation firm to confirm the company's value. A valuation will assist you with determining if your offer price is reasonable or needs to be renegotiated.

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