Business Loans

When is the Right Time to Acquire an Existing Business?

Jun 13, 2016 • 3 min read
Sell Your Small Business
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      Purchasing an existing business is much less of a gamble than starting a new one from scratch, especially for risk-averse entrepreneurs. For one, the startup costs tend to be lower, and you may be able to get cash flow right away due to existing receivables and inventory. Before applying for a business acquisition loan, it’s important that you complete due diligence to ensure that you’re familiar with all the conditions of the purchase.

      The right time to acquire an existing business is when you find one with a good labor pool, a strong customer base, established procedures, growing sales, and most importantly, positive cash flow. It should also be the type of business where you can leverage your strengths and your experience. Once you find what you’re looking for, get in contact with your attorney and your banker to thrash out the details.

      Existing cash flow and a proven track record will make it easier for you to secure financing for the venture of your choice. You’ll have better access to cash flow once your customer base is good, and you have strong distributor and supplier relationships in place. All of these factors save you a lot of time and money. You may also be able to draw on the experience of the previous owners if they are willing to guide you as you take over the business.

      Keep the Downside in Mind

      On the downside, purchasing a business is often more expensive than starting from scratch. Think long and hard about the kinds of establishments you’re attracted to and which best match your experience and skills. You can find great ventures for sale if you contact a business broker. If you’d like to go it alone, you’ll need to take several things into consideration, such as business size, geographical area, and industry.

      You also have to consider that the owner may try to downplay any business problems. These problems may be inherent, and may not become apparent until after the sale. Existing staff can offer valuable insight into areas that can be upgraded and how the business runs, and they can give you an active perspective of the business as opposed to the theoretical one you’re likely to get from the boss.

      Another problem is that equipment and inventories may be obsolete. In addition, customers may owe the business, and these bills may be virtually uncollectable, making them worthless.

      There are other disadvantages to purchasing a business, and you must obviously consider them seriously versus the advantages. When you’re negotiating a business acquisition loan, you must assess the existing operations of the venture thoroughly and diligently, which can be an overwhelming task.

      If a business is doing badly, scrutinize it to find out what the reasons are. Inadequate resources and poor management are two common causes. Your investment may turn out to be lucrative if you can turn the business around and make it profitable; on the other hand, you’re taking a huge gamble if it doesn’t work out.

      Financing Your Business Acquisition

      Business Acquisition Loan Most small businesses close their doors for one reason or another within a few years of starting up. An existing company gives you the advantage of business systems that have been honed over time.

      If you have the funds to make a 10-20 percent down payment, industry experience or business management skills, and good credit scores, an SBA loan would be ideal. If yours is a large business, you can apply to the big banks (this is one of the toughest sources of financing for small businesses to tap into).

      On the plus side, it can be easier to get financing for an existing business than for one that has not yet proven itself profitable. Take the case of a reputable business with an asking price of $500,000, and steady yearly cash flows of $200,000. Match that with taking out a $300,000 loan to bankroll a startup, where forecasts may or may not be realized. A bank may be more prepared to fund the half-million deal if you have a realistic down payment, and if the company you’re purchasing has historic income and adequate cash flow to service the debt.

      If you’d like to see your funding options for a business acquisition loan, visit today. Lendio will ask you a few basic questions, and will narrow down the lenders that are right for your purposes. Doing business this way saves you a lot of time, and it will help you take over your business and start making a profit much sooner than if you take the traditional route.

      About the author
      Tyler Heaps

      Tyler is a member of the Lendio marketing team. He is passionate about digital marketing, small business, and helping small business owners succeed. Tyler is an outdoorsman and loves spending time with his family.

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