5 Key Components Of A Small Business Acquisition Loan

Major Challenges To Securing A Loan

Qualifying for a small business acquisition loan can be quite an ordeal to say the least.

If the business being sold is very profitable, the selling price will likely reflect a significant amount of goodwill which can be very difficult to finance.

If the business being sold is not making money, lenders can be difficult to find even if the underlying assets being acquired are worth substantially more than the purchase price.

Business acquisition loans, or change of control financing situations, can be extremely varied from case to case.

That being said, here are the major challenges you'll typically have to overcome to secure a small business acquisition loan.

>>> Financing Goodwill

The definition of goodwill is the sale price minus the resale or liquidation value of business assets after any debts owing on the assets are paid off. It represents the future profit the business is expected to generate beyond the current value of the assets.

Most lenders have no interest in financing goodwill.

This effectively increases the amount of the down payment required to complete the sale and/or the acquisition of some financing from the vendor in the form of a vendor loan.

Vendor support and Vendor loans are a very common elements in the sale of a small business.

If they are not initially present in the conditions of sale, you may want to ask the vendor if they would consider providing support and financing.

There are some excellent reasons why asking the question could be well worth your time.

In order to receive the maximum possible sale price, which likely involves some amount of goodwill, the vendor will agree to finance part of the sale by allowing the buyer to pay a portion of the sale price over a defined period of time within a structured payment schedule.

The vendor may also offer transition assistance for a period of time to make sure the transition period is seamless.

The combination of support and financing by the vendor creates a positive vested interest whereby it is in the vendor's best interest to help the buyer successfully transition all aspects of ownership and operations.

Failure to do so could result in the vendor not getting all the proceeds of sale in the future in the event the business were to suffer or fail under new ownership.

This is usually a very appealing aspect to potential lenders as the risk of loss due to transition is greatly reduced.

This speaks directly to the next financing challenge.

>>> Business Transition Risk

Will the new owner be able to run the business as well as the previous owner? Will the customers still do business with the new owner? Did the previous owner possess a specific skill set that will be difficult to replicate or replace? Will the key employees remain with the company after the sale?

A lender must be confident that the business can successfully continue at no worse than the current level of performance. There usually needs to be a buffer built into the financial projections for changeover lags that can occur.

At the same time, many buyers will purchase a business because they believe there is substantial growth available which they think they can take advantage of.

The key is convincing the lender of the growth potential and your ability to achieve superior results.

>>> Asset Sale Versus Share Sale

For tax purposes, many sellers want to sell the shares of their business.

However, by doing so, any outstanding and potential future liability related to the going concern business will fall at the feet of the buyer unless othewise indicated in the purchase and sale agreement.

Because potential business liability is a difficult thing to evaluate, there can be a higher perceived risk when considering a small business acquisition loan application related to a share purchase.

>>> Market Risk

Is the business in a growing, mature, or declining market segment? How does the business fit into the competitive dynamics of the market and will a change in control strengthen or weaken its competitive position?

A lender needs to be confident that the business can be successful for at least the period the business acquisition loan will be outstanding.

This is important for two reasons. First, a sustained cash flow will obviously allow a smoother process of repayment. Second, a strong going concern business has a higher probability of resale.

If an unforeseen event causes the owner to no longer be able to carry on the business, the lender will have that the business can still generate enough profit from resale to retire the outstanding debt.

Localized markets are much easier for a lender or investor to assess than a business selling to a broader geographic reach. Area based lenders may also have some working knowledge of the particular business and how prominent it is in the local market.

>>> Personal Net Worth

Most business acquisition loans require the buyer to be able to invest at least a third of the total purchase price in cash with a remaining tangible net worth at least equal to the remaining value of the loan.

Statistics show that over leveraged companies are more prone to suffer financial duress and default on their business acquisition loan commitments.

The larger the amount of the business acquisition loan required, the more likely the probability of default.

Related resources:

Related searches: Business Acquisition Loan, Loan, Finance, Asset, Business acquisition, Sales, Goodwill (accounting), Small Business Administration, Business,

NetMarketZine is an officially authorized and remunerated associate for recommending high quality products found on this website. Links on this website may be associate links which means if you click on a link of a recommended , I/we may receive monetary compensation. However, this does not affect any unbiased information presented on this website. The owner of this website is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon properties including, but not limited to, amazon.com, endless.com, myhabit.com, smallparts.com, or amazonwireless.com. Additional affiliate programs and networks may include Avantlink, CJ, Clickbank, Walmart, BestBuy, AliExpress, and others.

You May Also Like These Topics...

Bitcoin Could Possibly Sink Even More, But You Can Still Profit with the Staff at the Blockcharter.

Blind hope for a recovery or perhaps a bull run is one thing every speculator has experienced at least one time. The Professionals at JP Morgan have forecast that Bitcoin (BTC) could possibly tumble below $1,260, while banks will not likely reap the benefits of blockchain for a minimum of 3 to 5 years. (Reuters […]

Allegro.ai Launches New Startup and Partner Programs

After receiving investments from leading enterprises Hyundai, samsung and Bosch, the enterprise focused computer vision startup allegro.ai is declaring the launch of two important enterprises – The Startup Program and The Partner Network. Founded in 2016, allegro.ai announced this week that it will be making its enterprise grade solutions available to selected startups that demonstrate the […]

Comparing Business VoIP Providers

VoIP has easily replaced the traditional landline. A lot of business owners prefer to use VoIP services and save huge amount of money that would otherwise be spent on efficient . Every business depends on internal and external communication to grow and VoIP makes it possible for the business to reach its potential with cheap […]

6 Features That a Data Quality Management Tool Should Have

Data has emerged as a key decision-making tool for businesses today. The data-driven enterprises gather information from all the sources it can, structures this information and then analyzes it to get rich and actionable insights. This data could relate to customers, suppliers or employees depending on the source it comes from and the people it […]

Tags: , , , ,
Previous Post

How To Making Money With A Network Marketing Affiliate Program

Next Post

How Social Media Marketing Can Boost Your Business

Leave a Reply

0 Shares
Tweet
Share
Share
Pin