Business Acquisition Financing
Entrepreneurs seeking business acquisition financing may secure funding more easily than those seeking capital to start a new enterprise. Statistics indicate that over half of new businesses fail within the first three years. However, existing companies which have a history of stable profits, sound management, a stable workforce, and a strong customer base may be a wiser choice for investors. Because of a tight credit market, lenders are more apt to give the nod to financing businesses with proven documentation of success, rather than funding an entrepreneur's pipe dream. Most commercial banks and financial institutions are cautious about extending loans for startups because of the current volatility of the U.S. stock market and a fragile economy wrought with woes from every sector. Banks simply cannot afford to risk losing money on startups that have a high rate of failure. Due to the current credit crunch, only those owners with high credit scores can even qualify for business acquisition financing. Dreams of starting a new enterprise may have to be put on hold, at least until the economy stabilizes. "To every thing that is a season, and a time to every purpose under the heaven: A time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted. A time to kill, and a time to heal; a time to break down, and a time to build up" (Ecclesiastes 3:1-2).
What lenders are looking for in requests for business acquisition financing is low risk. Before extending credit to new owners, banks and financial institutions want to know that the acquisition or franchise has a good reputation of paying vendors, suppliers, and employees on time; a good cash flow with enough reserves to tide owners over during slow seasons or economic downturns; a solid product or service in reasonably high demand; a loyal team of highly skilled employees with low turnover; and above all, capable managers with a keen vision and the flexibility to adjust to a challenging economy. A stable enterprise with a history of sound fiscal management anad consistent net profits is a good risk for business acquisition financing. Companies and franchises which offer in-demand products and services that are not affected by stock market fluctuations are also low-risk investments. Additionally, the fact that an existing corporation is capable of maintaining a loyal team of satisfied employees dedicated to upholding the mission and vision of the company speak reams about its ability to remain viable in spite of a recession.
In addition to a loyal workforce, astute management, and a solid product or service, business acquisition financing companies also rate enterprises on longevity. Since startups have a three-year failure rate, businesses with five, ten or twenty years under their belt have most likely endured economic ups and downs, cash flow problems, and highs and lows in consumer to earn some bragging rights and the respect of potential lenders. Commercial lenders and buyers can appreciate the work that goes into ensuring the success of small or large corporation. Developing and implementing effective marketing and sales programs; providing ongoing training to sales and production personnel, and providing superior service to a well established customer base are all key ingredients in building a successful enterprise that lenders are willing to finance.
To ensure the continued success of an existing company or franchise, banks which offer business acquisition financing may require that new owners retain key management personnel. Veteran administrators and managers are familiar with the product, production processes, and human resources issues. Many new owners make the mistake of retiring or firing existing management and bringing on new directors and supervisors. But the transition from old to new ownership can be a pretty rocky road. Disgruntled employees may want to resign; and a new administration may have a different management style that requires extensive staff adjustments. By retaining seasoned key personnel, especially during the transitional period, there will be fewer fluctuations in productivity and profits. Business acquisition financing firms will also want to see a detailed business plan with projected income earnings, marketing and advertising strategies, proposed staffing changes to increase productivity, and suggestions for gaining and retaining a greater share of the market.
Investors seeking to acquire an existing company or franchise should search the Internet, the local classified newspaper, or trade publications for commercial ventures for sale. Real estate agents may also advertise enterprises looking for new owners. Offshore investments may also be a good risk for lenders as well as new owners. One advantage to acquiring an offshore enterprise is the tax savings and potential to protect assets. While business acquisition financing is more readily obtained to purchase ownership in profitable companies, banks and lenders may be willing to extend loans to acquire failing corporations with the potential for higher earnings under new management. If new investors can present detailed plans for improving the productivity, personnel, and profitability of a failing enterprise, lenders may want to buy into a potentially lucrative investment. Sometimes all it takes is a fresh vision, a different marketing strategy, or an improved product line or service to inject renewed vigor into a business that is teetering on the brink of extinction. No matter which type of company investors choose to purchase, taking the time to carefully review financial records, interview management and accounting staff, study marketing and sales performance records, and shop for the lowest interest rates and financing terms will help lay the foundation for long term success.