5 Key Components Of A small business Acquisition Loan


5 Key Components Of A Small Business Acquisition Loan

The main challenges when obtaining a loan for the purchase of a small business

Qualifying for a loan to acquire a small business can be an ordeal, to say the least.

If the 
small business
 being sold is very profitable, the selling price will likely reflect significant goodwill which may be very difficult to finance.

If the 
small business
 being sold does not make a profit, it may be difficult to find lenders, even if the underlying assets are worth substantially more than the purchase price.

small business
 acquisition loans or financing a change of control can vary greatly from case to case.

However, these are the biggest challenges you usually have to overcome to get a loan for a small business acquisition.

>>>  Goodwill financing

The definition of goodwill is the selling price less the resale or liquidation value of the company's assets after paying off the debts of the company's assets. It represents the future profit that the company is expected to generate over and above the current value of the assets.

Most lenders are not interested in financing goodwill.

This effectively increases the amount of down payment required to complete the sale and/or obtain seller financing in the form of a seller loan.

Supplier support and supplier credit are common elements when selling a small business.

If they are not initially included in the conditions of sale, you may want to ask the seller if they would consider assistance and financing

There are some good reasons why it might be worth asking the question
To obtain the highest possible sales price, which is likely to involve a certain level of goodwill, the seller agrees to finance a portion of the sale by allowing the buyer to pay a portion of the sales price over a specified period within a structured payment plan

The provider may also offer transitional assistance for some time to ensure that the transition period goes smoothly

The combination of seller support and financing creates a positive self-interest whereby it is in the seller's best interest to assist the buyer in a successful transition in all aspects of ownership and operation.

Failure to do so may result in the seller not receiving all of the proceeds from the sale in the future if the business suffers or fails under the new ownership

This is often a very attractive aspect for potential lenders as the risk of loss is greatly reduced through the transition

5 Key Components Of A small business Acquisition Loan

                This speaks directly to the financial challenge ahead

>>> Business transfer risk

Will the new owner be able to run the company as well as the previous owner? Will customers continue to do business with the new owner? Did the previous owner have certain skills that were difficult to reproduce or replace? Do key employees remain with the company after the sale?

A lender must be confident that the business can continue to operate successfully without a deterioration in current performance levels. It is usually necessary to build into financial forecasts a margin for delays that may occur in the change.

At the same time, many buyers buy a company because they believe there is significant growth from which they can benefit.

The key is to convince the lender of your growth potential and ability to achieve excellent results.

>>> Selling assets versus selling shares

For tax reasons, many sellers want to sell their company's shares.

However, this means that all outstanding and potential future liabilities in connection with the going concern will be borne by the buyer unless otherwise specified in the purchase agreement.

Because a company's potential liability is difficult to estimate, there may be a greater perceived risk when considering a small business acquisition loan application that involves the purchase of stock.

>>> Market risk

Is the company in a growing, mature, or declining market segment? How does the company fit into the competitive dynamics of the market? Will a change of control strengthen or weaken your competitive position?

A lender must be confident that the company can be successful at least during the term of the business acquisition loan.

This is important for two reasons. First, sustainable cash flow will enable a smoother payment process. Second, a solid, functioning business has a higher chance of resale.

If an unforeseen event results in the owner no longer being able to continue operating the business, the lender can be confident that the business can still make sufficient profits through resale to pay off the outstanding debts.

Localized markets are much easier to evaluate for a lender or investor than for a company selling to a wider geographic reach. Local lenders may also have some knowledge of the particular company and its importance in the local market.

>>> Personal assets

Most small business
 purchase loans require that the buyer be able to invest at least a third of the total purchase price in cash and that the remaining tangible equity is at least equal to the residual value of the loan.

Statistics show that over-indebted companies are more likely to suffer from financial pressure and are no longer able to meet their loan obligations for business acquisitions.

The higher the loan amount required to purchase a company, the greater the probability of default

5 Key Components Of A small business Acquisition Loan

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