Qualifying for a small business acquisition loan can be a daunting experience, to say the least.
If the business being sold is very profitable, the selling price will reflect a considerable goodwill and can be very difficult to finance.
If the selling business is not making money, it can be difficult for lenders to find out if the underlying asset is worth more than the purchase price.
Business acquisition loans, or change of governance financing conditions, can vary greatly in each case.
Here are some of the main challenges you will usually need to overcome to obtain a small business acquisition loan.
The definition of goodwill is the resale or liquidation value of a business asset after paying off the debt on the asset. It represents the future profit expected by the business rather than the present value of the assets.
Most lenders have no interest in paying for Goodwill.
As a sales loan, it effectively increases the amount of payments required to complete the sale and / or acquisition of any financing from the seller.
Seller support and sales credit are a very common part of selling a small business.
If they are not first in the terms of the sale, you may want to ask the seller for assistance and financial assistance.
There are a number of good reasons to ask your question.
In order to obtain the maximum possible selling price, a seller agrees to finance a portion of the sale by allowing the seller to pay a portion of the selling price within a specified time period in a structured payment. Time Table.
The vendor may provide transition assistance for a period of time to facilitate the transition period.
The combination of seller support and financing generates positive legitimate interest and helps the seller to successfully transition into all aspects of the owner and operations.
Failure to do so will result in the seller not receiving all the money the seller receives in the future if the business suffers or fails under the new ownership.
This is generally an interesting feature for prospective lenders, as the risk of loss due to the transition is greatly reduced.
This speaks directly to the next financing challenge.
>>> Business Transit Risk
Can the new owner as well as the previous owner run the business? Are customers still doing business with the new owner? Does the previous owner have a specific skill set? Do key employees stay with the company after the sale?
The lender must be confident that the business can continue to thrive beyond its current performance level. Generally, there should be a buffer into the financial projections for possible change delays.
At the same time, many buyers will buy a business because they believe there is significant growth.
The key is to convince the lender of your potential for growth potential and higher returns.
>>> Selling stock vs. selling assets
For tax purposes, most sellers want to sell parts of their business.
However, doing so does not fall within the buy-and-sell agreement, and falls to the buyer at the significant and potential future liabilities associated with the ongoing concern business.
Because assessing potential business liabilities is difficult, a small business acquisition loan application with respect to a share purchase may be at high risk.
>>> Market Risk
Does the business have a growing, mature or declining market share? How does the business adapt to the competitive dynamics of the market and does a change in governance strengthen or weaken its competitive position?
The lender must be confident that the business will be able to succeed for at least the period of the business acquisition loan.
This is important for two reasons. First, a sustained cash flow will clearly allow for the repayment process. Second, a business with a strong focus is more likely to resell.
If an unexpected event occurs, the lender is confident that if the owner is no longer able to carry on the business, repayment of the loan will generate sufficient profit for the business.
It is easier for a localized market lender or investor to evaluate a business than to sell it to a broader geographic location. Area-based lenders may have some knowledge of a business and how prominent it is in the local market.
>>> Personal net worth
For most business acquisition loans, the buyer can invest at least one-third of the total purchase price, and the tangible net worth is at least equal to the remainder of the loan.
Statistics show that leveraged firms are more vulnerable to financial hardship and have defaulted on their business acquisition credit obligations.
The larger the business acquisition debt, the greater the probability of default.