Many people will have considered purchasing a business either to add to their existing portfolio or as a means of leaving the rat race behind.
Securing funding is the first step in acquisition
Jonathan Russell of Intelligent Business Transfer says: “Although this is counter-intuitive to many, securing funding and speaking to would-be lenders will ensure you select a business that you can definitely afford. Often the main reason business sales fall down is due to poor planning by the buyer of the business.”
We have outlined the financial options that are available to you.
With unsecured loans, you don’t provide any assets as security. However, because the lender is taking on more risk, it may be more expensive for you to borrow. You may need to pay a personal guarantee which will make you liable to fork out if the business fails to pay. Companies with multiple directors might need to provide multiple personal guarantees.
The term and amount to repay on an unsecured loan will vary but if you have a bad credit rating, it’ll be a more difficult option to explore because of that risk to the lender. It may also take several weeks to process.
As you may have guessed, a secured loan requires an asset that you agree with the lender should the business fail to keep up with repayments. Assets can include things land or equipment or a combination of several resources. The lender will have the legal grounds to take the asset if you can’t make the repayments.
The increased risk for you means that these loans are easier to come by with a lower rate of interest and a longer repayment period.
You might be able to use the assets of the business you are buying to fund its purchase, but it would be more difficult to arrange.
Securing funding through the large bank institutions can be difficult for anybody looking to purchase a business. Banks tend to look more favourably upon the purchase of an existing business with a proven track record – especially if you can demonstrate your capabilities in the industry – than a start-up or young business.
Banks will want to see your accounts and proof that your business is growing as well as personal accounts to get an idea of your own spending habits. They’ll need to see your business plan, a cash flow forecast and budget plan.
Not everyone will have access to a bank loan. Fortunately, under the Bank Referral Scheme, banks are required to refer people looking for funding to alternative funding providers if they are not deemed creditworthy. The banks would more than likely have to refer the unsuccessful applicant to other providers such challenger banks and peer-to-peer lending services.
Peer-to-peer finance and crowdfunding
Peer-to-peer lending (P2P) and crowdfunding provides financing through a consortium of investors. On the P2P sites, businesses request a specific amount at a set interest rate and lenders fund all or a portion of the loan. As with a standard loan the lender is then paid back with interest over a set period.
Although this type of lending is typically utilised by the actual owners of the businesses, people can still use P2P lending to fund the purchase of an existing business that may otherwise not survive or if they can demonstrate the business’ importance to a local community.
Seller loans are more flexible in that they can give you a loan over a few years and you’ve got more flexibility as to how much of the selling price it covers. They can be used to tie payments to the performance of the business.
Take on debt
In this instance you assume some of the debts – but the original lenders would have to agree to switch over the loan to your name. The lender may also need to re-underwrite the loan.
Think Dragon’s Den here – you approach investors with your proposition and if they like it, they give you a portion of money in exchange for a share of the business that you’re buying. The risk taken on by them mean that they’ll be expecting greater returns than your average debt provider.
Angels tend to focus their efforts on businesses in the early stages so are ideal for those looking to buy a business.
Some have specialist backgrounds which would be helpful in getting your venture going. Even if they don’t, their general expertise will still be helpful. They tend to stay local, focusing on small geographic areas and nearby networks.
Most venture capitalists will invest more in businesses with the potential for high returns – normally with a competitive advantage and a strong USP. This method is more effective for buyers who have previously owned a business so that they can prove their track record.
In addition to these, you can pay some of the cost yourself. If you can’t cover it alone, you may have to rely on stock investments, mortgages against your home or your retirement fund. Alternatively, you could use your own funds as a down payment and finance the rest. Be realistic about how much you can put forward – you don’t want to be left struggling to pay for other essentials.
If they’re willing, you could try borrowing from friends and family. This is often one of the last options that people pursue in their search for finance and carries very different types of risks – typically putting more strain on personal relationships.