There are a variety of reasons to acquire an existing business rather than start one yourself. For one, there may be less risk involved because the business is already established and has a brand, customer base, staff, location, etc. Much of the work that goes into a startup has already been done. And it's usually easier to get a loan to purchase an existing company than it is to gain startup capital for an unproven concept.
Regardless of your specific reason, chances are you'll need to secure a business acquisition loan to help you finance the purchase of the business. Following are some tips to consider if this is a route you are considering.
Have a solid business plan
To secure any business loan, you need to have a solid business plan that can easily demonstrate the business's value and, more importantly, how it will allow you to pay back the loan.1 The owner of the business you’re buying should be able to supply you with several years’ worth of financials showing its annual sales, profit, cash flow, etc. This can form the basis of your plan, along with projections on how you intend to improve and/or grow the existing business.
Make sure you have a grasp on the market
Knowing your market, including trends, future projections, and competitors, will not only help you put together a smarter and more convincing business plan, but it will also help prepare you to answer any questions the lender may have. You won't give a very good impression if you appear to be clueless about the very market you're trying to enter.
Maintain a good credit score
Just as with any other type of loan or credit you apply for, your credit score plays a significant role in whether you'll be approved. Be sure you're paying all your bills on time and keeping your credit card balances down. Always check your credit score before applying for a loan so you're not caught off guard if it's not as high as you thought it would be. If it needs improvement, work on that before going after a business acquisition loan.
Consider bringing in a partner or partners
Having one or more business partners can help set you up for greater success, especially if the partners have experience in the kind of business you’re buying. If they have good credit, they can also help you secure the loan you're seeking. However, if their credit score needs improvement, they can also hurt your chances. Make sure all parties are aware of the credit situation before applying. You want to present the best possible credit scenario before you reach out to the lender.
Come up with a significant amount of cash on your own
If you can bring a sizeable down payment to the table, you will also be helping your chances of securing a loan.
"You need to make sure that you have something that you can use for a down payment," says FinancialWeb.2 "On most commercial loans, the bank is going to require at least a 20% down payment. If you do not have enough for the down payment, it may be difficult to get a loan. When the bank makes you pay a down payment, they are making sure that you have some personal money at stake in the deal. If you did not have to make a down payment, you may not care if the venture succeeds or fails. This way, you will have a lot invested and you will tirelessly work to make sure that the business succeeds."
Have tax returns ready
In addition to a business plan, a solid credit score, and a down payment, you'll want to have your tax returns ready for the lender to view. These provide an additional look at your financial profile beyond what a credit report can supply. Typically, they'll want to see your past three years' returns as well as those for any partners.
Ultimately, your ability to secure a business acquisition loan will be based on the business plan you are able to present, your credit and financial history, and the financials of the existing business which you are acquiring.
Be sure to check out these small business financing resources from Nevada State Bank.
1. This NevadaSmallBusiness.com article explains how to create the financial part of your business plan: https://nevadasmallbusiness.com/tips-for-putting-together-a-great-business-plan/
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A. Member FDIC