Are you considering expanding your business or diversifying your investment portfolio? Business acquisitions could be the key to achieving your goals. Learn more about the components of a purchase and how a business acquisition loan can help.
Start With Self-Reflection
The decision-making process when acquiring a business is twofold. Business owners need to start with a list of tasks to ensure their business plan is effective before engaging with the target company. To do this, you need to:
1. Think About Your Strategy
Before diving into the technicalities and numbers, start with the strategic alignment of the potential acquisition. Ask yourself how this acquisition fits into your long-term business goals. Does it provide access to new markets, technologies, or product lines? Will it enhance your competitive edge? The synergy between your existing operations and the acquired business is fundamental for realizing value post-acquisition.
2. Define Your Acquisition Criteria
Determining the specific criteria you are looking for in a potential target business. Consider factors such as industry, size, location, and financial performance. Additionally, review the target company’s cash flow projections and debt obligations to understand its financial health and stability.
3. Evaluate Your Financing Options
When it comes to acquiring a business, one of the most critical factors to consider is how you will finance the purchase. There are several financing options available, each with its own set of pros and cons.
- Traditional Loans: One of the most common ways to finance a business acquisition is through a traditional bank loan. These business acquisition loans typically require a solid credit history and collateral but can offer competitive interest rates and longer repayment terms.
- SBA Loans: Small Business Administration (SBA) loans are another popular option for financing business acquisitions. These loans are backed by the government, making them less risky for lenders. However, the application process can be lengthy and require a significant amount of documentation.
- Investor Funding: If you’re looking to acquire a larger business or don’t have the capital to finance the acquisition on your own, investor funding may be a viable option. This can come in the form of venture capital, private equity, or angel investors. While this can provide the necessary capital, it also means giving up a portion of ownership and potentially sacrificing some control over the business.
Are you a small business owner in need of financing? Ready Capital offers for small businesses that can help you achieve your goals.
Research the Target Company
When it comes to mergers and acquisitions, identifying the right target businesses is crucial for a successful deal, especially if you are relying on a business acquisition loan. Choose a business that aligns with your strategy and goals with the following tips:
1. Know Who’s Involved in the Deal
The biggest risk in commercial lending is in change-of-ownership transactions, such as business acquisitions, commercial real estate purchases, or partner buyouts. Ask yourself questions such as: “Is the seller juicing up the numbers to maximize the asset values of the underlying business? Why is the seller selling, and does it make sense that they are selling at the price they are selling at?”
To avoid risk, do the following:
- As the buyer, make sure your name matches up with the borrowing entity documents. Any change in the buyer’s ownership must always be disclosed to the lender.
- If the purchase agreement needs to be assigned, make sure the agreement allows for it for both the seller and the buyer.
- Make sure you know the seller and do your due diligence to prevent legal action. It’s advisable to have your attorney run legal searches on the entity selling assets and the individuals who are authorized to sign on behalf of the corporation that is selling the assets. Otherwise, injunction and other legal actions could negatively affect the buyer after money changes hands.
2. Break Down the Purchase Price Allocation
Buyers must always do their due diligence before they make an offer to acquire the assets of the seller. However, they are limited by what their lender can extend in the way of loan proceeds based on the purchase price allocation of the business assets being acquired.
To break down the purchase price allocation, ask yourself the following questions:
- What is the seller’s estimate of the real estate market value?
Know that each lender’s risk appetite is different, but the SBA Standard Operating Procedures (SOP) state that lenders may advance up to 85% of the market value of commercial real estate.
- What is the seller’s estimate of the orderly liquidated value of equipment?
Similarly, the SBA SOP allows lenders to advance up to 75% of the Orderly Liquated Value of Equipment.
- What is the seller’s estimate of the goodwill or intangible value of the business you are purchasing?
You should always review the selling business’s earnings before interest, taxes, depreciation, and amortization (EBITDA) with the proper adjustments, such as the seller’s personal expenses and overstated payroll costs.
3. Be Aware of Non-Competition Agreements and Restrictive Covenants
Non-competes are extremely important, especially in the sale of business transactions whereby the seller obtains a significant cash payment in consideration for the sale of assets. Even more important is ensuring that the non-competition clause is enforceable in the state where the buyer is acquiring the assets.
Know that each state has different standards, but the key components are the duration of the non-compete clause, the function industry in which the business is involved, and the geographic restrictions associated with the non-compete.
The Bottom Line
Acquiring a business is a multifaceted process that requires thorough due diligence, strategic thinking, and careful negotiation. By paying close attention to financials, legal considerations, and more, you can significantly increase the chances of a successful acquisition.
Remember, the goal of any acquisition is not just to buy a business but to successfully integrate it in a way that adds value to your existing operations. As you navigate this complex landscape, use this guide as your compass, and consider engaging with experienced advisors like Ready Capital for further assistance.
Realize Your Business Expansion Dreams with Ready Capital
Are you ready to acquire a business, take your business to the next level, or diversify your portfolio with a strategic acquisition? With Ready Capital, navigating the financing of your business acquisition becomes seamless and efficient. Our comprehensive support, from understanding the nuances of government-guaranteed loans to structuring complex deals, ensures you have the resources to make informed, strategic decisions.
At Ready Capital, we bring decades of expertise in government-guaranteed lending, a high lending capacity, and a commitment to creative problem-solving to the table. Whether you’re eyeing expansion or entering new markets, our team is here to guide you through every step of the acquisition financing process. Partner with us today and gain the support of a top-tier lender.
