When looking to acquire a business to expand your market share and enterprise valuation, there are several funding options for securing the deal.
Let’s start by using this industry as an example…
In the commercial service industry, acquisitions can be partial or whole and can range from a business with just one truck to the largest companies at the peak of the industry. Since the majority of sellers are looking to exit completely, we will look through the lens of funding a complete sale to determine the best ways to acquire, implement, and then expand.
A common option is typically reserved for acquisitions of smaller companies where a customer list is purchased with a small down payment and the seller is given a commission on any sales from the customer list for a set time. For larger companies that will provide a more significant boost to your company, the seller is going to expect a higher purchase price for the value that they have built-in their company.
The seller may only want to sell if they receive cash at closing or they may want to hold a seller note where the buyer pays them an amount owed with interest over several years or even a combination of the two. When the seller wants cash at closing for the purchase of their business, there are two options, which can be used for the seller to receive all cash at closing. A buyer can either use their cash to purchase the business or can borrow money to buy the business.
Cash can either be derived from the company balance sheet, personal cash, or funding from a partner to help acquire the company. Cash takes time to build up, and if an owner brings on a new partner, their ownership stake will be diluted, and their portion of the profits will decrease.
It can also be challenging to acquire a company for $1 million where the seller wants the cash upfront, so how can you come up with the funds to execute on the acquisition?
The best avenue for many is an SBA 7(a) loan. A government-guaranteed loan program administered by the Small Business Administration allows businesses the opportunity to grow through acquisition with the emphasis of approval being on the cash flow of your business and the business you are acquiring, not the collateral. In short, if the business can cash flow, the debt can be services.
Borrowing money from a bank can be a solution that limits the amount of upfront cash the buyer needs to buy the business and allows the buyer the ability to acquire the company and not have to bring on an additional partner. You can leverage the historic success of your current business as a foundation for future acquisitions. You will want to make sure your personal/business credit is in a position to get a yes from a bank when looking towards SBA. Ordinarily, a 650+ FICO is required.
A business owner can borrow up to $5 million at any one time using the SBA 7(a) program. However, for many owners, they may have plans to make several acquisitions over the next few years. Over this span of time, you can receive multiple SBA loans to fulfill those acquisitions. For example, you could acquire a company for $800,000 each year for the next five years and use an SBA loan to do so.
The structure of a business acquisition using an SBA 7(a) loan is predominantly flexible. You can combine a bank loan, seller note, and down payment to make a purchase or use an SBA loan to satisfy the full purchase price.
If you’re committed to growth through acquisition, contact us to learn more about your financing options to acquire your target companies.