Funding a Business Acquisition

 

The credit crunch has led to an increase in seller financing, asset-based lending and alternative sources of capital for buyers.

A recent Inc.Com article on funding business acquisitions notes the huge changes in our financial system over the last 24 months due to the subprime lending crisis and the general economy. This has led to many traditional lenders modifying their lending criteria, and restricting available credit and the flow of capital to many entrepreneurs. Some of the key points in the article:

1. Bank financing of 80% or more with buyer and seller splitting the down payment have now shifted to 50% bank financing, and more seller financing.

2. Alternative lenders have sprouted up, but criteria and conditions can vary a lot, so buyers need to get educated on their options.

3. Deal structure will depend very much on the condition of a company. The type of business being acquired, the valuation of assets and cash flow, perceived market risk as well as growth plans, are the characteristics that determine which capital sources and financing structure is the most appropriate.

4. For bank financing you will need good credit, strong cash flow and profits and minimal existing debt load. SBA loans now provide up to $5 million.

5. Seller Financing may provide up to 70% funding. Typical terms would be 5 to 7 years with 8 – 10% interest.

6. Asset based lending – on equipment and business assets – can be easier to obtain but you will pay a significant interest penalty.

7. Private Equity may be an option for companies with $2 million plus in net earnings, but it will come with significant conditions and the owner will give up a large chunk of equity.

8. Other options include a mix of debt and equity called Mezzanine financing.

 

To get the best possible financing terms and improve the likelihood of success in any deal structure, you need to make sure your offering memorandum or business plan is well thought out. Your plan should be based on the combined business operation and not just your current business. It should illustrate how the combined operations will provide more collateral, more cash flow, and greater growth.

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