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Best Business Acquisition Loans

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If you’re in the market to buy a business or open a franchise, you’ll likely need to get some form of funding. To help you out, we’ve looked at the best available options to get business acquisition financing.

The Best Loans for Business Acquisition

In many cases, getting a loan to purchase an existing business will be easier than getting a loan to start a new business. We cover some of the best options available below.

Financing OptionProsCons
Seller financing / franchisor financing
  • Flexibility on loan terms
  • Low interest rates
  • May save on franchising fees
  • High down payment up to 50%
  • May not cover entire cost of business
  • Not every seller/franchisor does this
SBA 7(a) loan
  • Low interest rates
  • Loans up to $5 million
  • Long terms
  • High down payment up to 30%
  • Application and funding process can take several months
  • Need great credentials and relevant experience to qualify
Bank term loan
  • Low interest rates
  • Loans up to and exceeding $5 million
  • Long terms
  • High down payment up to 30%
  • Need great credentials and relevant experience to qualify
  • Lengthy due diligence process

Seller Financing and Franchisor Financing

There are two reasons we like seller financing to acquire a business: there is a lot of flexibility, and it’s one of the fastest ways to close on a deal. In a seller financing deal, you negotiate a loan directly with the seller of the business, and have more opportunity to obtain favorable terms when most lenders have fixed terms. You put a down payment on the business, which could be as high as 50%, and then pay the remaining amount plus interest to the seller. Payments can either be fixed or, in what is called an earn-out, based on the business’s performance. The earn-out option can be a mutually beneficial choice as the buyer can pay less in lower sales months, and as the seller is invested in the business’s growth.

If you’re buying into a large and well-known franchise, we recommend franchisor financing as one of the fastest ways to get funding. In many cases, the franchisors may offer direct financing to franchisees or partner with specific lenders to provide funds. Going through your franchisor may also save you on on franchise fees. Depending on what franchise you’re opening, you’ll need to check their website and documents for more information.

Best for: Borrowers who can put a large cash down payment, and franchisees.

SBA 7(a) Loan

If seller financing isn’t an option, consider an SBA loan. Not only do SBA loans have affordable interest rates, but they can be used to purchase an existing business or open a franchise. Through this program, you can borrow up to $5 million with interest rates from 6.5% to 9.0% with 10 or 25 year terms. You can see a full list of minimum requirements for SBA loans here, but in general, we recommend borrowers have strong business and personal credentials. This means meeting the “5 Cs of credit” -- capacity, character, capital, collateral and conditions -- by having good personal and business credit history, the ability to put up collateral, a strong business plan and financials, relevant management or industry experience and the ability to put some cash down (typically 20% to 25%).

To get an SBA loan, you’ll need to find a bank or lender in your area that offers them. The SBA has a handy tool on its website that will show you lenders in your area. Most national and regional banks offer some type of SBA funding, so you can probably get a loan from the bank you already work with. One downside to SBA funding is that the application and funding process often takes several weeks or months. However, this process can be expedited for certain franchises. If you aren’t buying a franchise, consider an SBA Express Loan, which promises a credit decision from the SBA within 36 hours. However, you can only borrow up to $350,000 through this program.

Best for: When seller financing isn’t viable, and borrowers with strong credentials.

Conventional Term Loan

Finally, as a last option, consider getting a conventional term loan from a bank or credit union. Getting a business acquisition loan will be a little easier than getting a loan for a new business, but you should expect a lengthy application and due diligence process. Not only will the lender want to know that you can successfully run and grow the business, but they want to see an established business with strong cashflow and finances. You’ll also need to show the lender what you, as an individual, can add to the business -- do you have specific skills or experiences that will make the company more likely to succeed?

As part of the process, you may need to hire an outside agency to perform a valuation of the company you’re buying. For your bank, having an independent valuation of the company will determine the appropriate amount to lend. It can also ensure you’re getting a fair price on the deal.

Best for: Borrowers with strong industry experience related to the business they are buying.

Other Business Acquisition Loan Options to Consider

If you’re looking to avoid debt-financing or a term loan, we discuss some other options for buying a business below.

Financing OptionProsCons
Rollover as Business Startups (ROBS) Plan
  • Debt-free way to start a business
  • No taxes on withdrawn funds
  • 2-3 weeks to close
  • Risking retirement funds
  • Ongoing maintenance fees
  • May be more likely to be audited by IRS
Investor or Partner
  • Debt-free way to start a business
  • Can close on a deal quickly
  • May have to give up equity and control of business
  • Relationship could turn bad
Home Equity Loans and Lines of Credit
  • Low interest rates
  • Risking home if you cannot repay
  • Must have significant equity built up in your home
  • High fees
Personal Loans
  • Most personal loans are unsecured
  • Low loan amounts (generally under $100k)
  • Will need great credit to qualify for decent interest rate
Loan from Family or Friends
  • Usually low interest rates
  • Flexibility on loan terms
  • Risk ruining personal relationship if you cannot repay
  • Potential tax implications for person making loan

Rollover as Business Startup (ROBS) plan: One popular option among franchisees is using your retirement funds to purchase or start a business or franchise by paying a third-party provider to set up a ROBS plan. However, a ROBS plan is only viable if you have enough money in your retirement accounts to cover the cost of the business or franchise outright. For many franchises, you may need to have $500,000 to $750,000 in liquid assets to open a new location. And even if you do have enough money, you’ll need to ask yourself if you’re okay risking your retirement savings on a new business. If the business goes under, you’ll have no recourse to recoup your investment.

Investor or partner: If you can’t put up all of the funds to buy a business, but have the chops to run it successfully, consider finding a partner or investor who can. You may have to give up equity in the business to secure an investor or partner, which means that you lose complete control over the company. However, for some individuals, this is a small price to pay for debt-free financing.

Home equity loans, personal loans and family/friends loans: These types of loans normally won’t be enough to cover the cost of purchasing a business. But if you have enough cash to put down that you only need $100,000 or less, these loans can be a way to cover the remaining expenses. Each type of loan has its own advantages and disadvantages. For home equity loans, you could lose your house if you cannot repay on the loan, and when you get a loan from a family member or friend, you are risking that personal relationship if you cannot repay.

How to Get a Business Acquisition Loan

Lenders will care about two things when you apply for a business acquisition loan: you and the business. For you, the lender will care about your:

  • Personal credit score: having a FICO score above 680 will make it easier for you to get approved and get a low interest rate.
  • Related experience and value add: you need to show the lender that you bring something valuable to the table, whether this is through lots of relevant experience, a specific set of skills and/or a strong business plan. Your lender will want to see your personal resume.
  • Business plan: you need to have a well-defined, logical strategy to take the business to the next level, and this should be laid out in your business plan.

For the business you’re buying, a lender will look at the following factors:

  • Business credit score: the business should have an established history of paying vendors and suppliers on time.
  • Current and past business finances: the lender will look at the company’s balance sheet, profit and loss statements, tax returns, current debt service and cash flow analysis to get a sense of the strength and viability of the company.
  • Financial projections: you will need to produce financial projections on revenue and sales for the next two years.
  • Business valuation: as discussed earlier, you will likely need to hire an independent firm to conduct a valuation of the business.

Your job when applying is to make it easy for the lender to approve the loan by either meeting all the points above with documentation proof, or to address some of these head on. You want to show the lender that you are buying an established, successful business, and that you have the skills and strategy to grow the business even more.

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