The Basics of Business Acquisition Loans

October 25, 2022

As Baby Boomers approach retirement and after two years of increased burnout resulting from the Pandemic, experts are expecting to see significantly more business owners opting to sell. For those looking to become an entrepreneur while avoiding much of the risk associated with starting a completely new business, there could be no better time than the present.

Business acquisitions are attractive for a variety of reasons. When you purchase an already established business a brand and customer base exists, the product or service it provides has been market tested, and the often-painful startup time is reduced dramatically. Last but certainly not least, the loan application process for an SBA 7(a) Business Acquisition Loan is often simpler than when starting up, providing entrepreneurs working capital faster. One can be used to:

1. Find the best fit. Choose a business that is the best fit for your skills and interests and identify one that is for sale. Websites such as BizBuySell are a good place to start.
2. Set your budget.  Determine how much you can comfortably spend. And remember, you should need 20% of purchase price for a down payment.
3. Surround yourself with an expert team. Before you start the acquisition process, be sure you have a team of experienced advisors to assist, including an accountant, lawyer, and valuation expert.
4. Determine Purchase Price. Once you find a business that falls within your budget, the exact purchase price you agree to should be determined using proven methodology that factors in earnings, forecasted cash flow and/or the value of the business’s assets.
5. Sign a Letter of Intent. When you’re ready to make the purchase, a letter of intent will prohibit the seller from negotiating with other potential buyers.
6. Find Financing. If you require funding, look for a lender who takes the time to understand your needs/goals and has experience structuring business acquisition loans to benefit all involved. Your lender will look at your personal credit in addition to the business’s financials, and will likely require:
   1. Two to three years of business and personal bank statements
   2. Three years of business and personal tax returns
   3. Year-to-date income statement and current balance sheet
   4. An income statement and balance sheet from year prior
   5. A business plan
   6. Projections for at least the first three years under your ownership
7. Close the deal. Submit all necessary paperwork, including lease and invoice of the sale.