Four Considerations Before Obtaining a Business Acquisition Loan
Aspiring entrepreneurs have two options when they decide to pursue the American Dream of business ownership: start one from scratch or purchase an existing business.
Many companies start with an entrepreneur’s great idea, such as Uber, the app that connects people looking for rides with independent contractor drivers who often charge lower rates than traditional yellow taxis or limousine drivers.
Other budding entrepreneurs look for opportunities to purchase existing businesses. Doing so eliminates many of the headaches and startup costs that come with launching a new venture. These challenges include bidding and selecting contractors, sourcing supplies, building a customer base from scratch, creating a brand and hiring staff.
Buying an established business might not seem as exciting, but it could be just as lucrative and a lot less risky than creating a new company. Due diligence is required. It is important to find out why a business is up for sale. If the company is struggling to pay its bills, that is surely a bad sign. However, if an original owner is contemplating retirement and his or her children are not interested in continuing in the family business, it might come at a good price.
For many reasons, buying a business is a lot less risky than funding a startup that has no track record of success. Purchasing an established company likely means there is already a base of customers, trained staff and operational success (if the firm has been in business for more than two years). Perhaps a few changes are all that would be needed to take a mediocre business to the next level.
An important thing to keep in mind is that it will likely be easier to obtain the funding to buy an existing business than it would be to secure startup capital. Loan underwriters will examine the financial data of the target business and assess the risk. Ultimately, the lender wants to know if the borrower will be able to pay back the loan. With a startup venture, all that can be provided are estimates, rather than real financial results.
Here are some things to consider before purchasing a business:
- Are you passionate about the product/service it provides?
- Do you (or your business partners) have experience in running the type of business you plan to purchase?
- How well do you know the local target market?
- How much funding can you obtain on your own (if any) and how much do you plan to borrow?
If you have an idea of the type of business you would like to own, try using BizBuySell, the Internet’s largest business-for-sale exchange with over 45,000 companies listed for sale. If you prefer the personal touch, try working with a business broker, who will help you through the process in much the same way that a real estate agent guides home-buyers.
Entrepreneurs who need outside funding have more sources than ever before when seeking to buy an existing business. If you require business acquisition funding, start the process by creating a business plan that explains what the business does, where it operates, and the road to success that you plan to take. The plan should include the following elements:
1. Executive Summary: A one or two-page detailed explanation of the business that outlines its goals, business proposition, operations, marketing and revenue projections. (It may be the only portion of the plan that an underwriter will read, so make sure this part really sells the venture.)
2. Business Description: Explain what business does.
3. Competitive Landscape: Provide a realistic assessment of the marketplace and explain why the business’s value proposition will differentiate it.
4. Product or Service: Provide details about the product or service.
5. Sales, Marketing and Promotion Plan: Explain who how you will approach the target market and build greater brand awareness to drive sales. Include: website enhancements (if needed), advertising spend, public relations plans (traditional and social media), sampling efforts, trade show attendance, and other sales promotions.
6. Executive Team: Include bios of the important management team members. Detail their experience.
7. Financial Information: Obtain copies of P&L statements, balance sheets, and business tax returns.
8. Owner Investment: Detail the cash contributions from each owner (if more than one partner is involved.)
9. Appendices: Supporting documents, such as logos, photographs, etc.
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This article, “Four Considerations Before Obtaining a Business Acquisition Loan” was first published on Small Business Trends