5 Key Components Of A Small Business Acquisition Loan

Significant Obstacles To Obtaining A Business Acquisition Loan

To put it mildly, qualifying for a small business acquisition loan may be quite the experience.

If the business is extremely prosperous, the selling price will almost certainly include a substantial amount of goodwill, which can be extremely difficult to finance.

If the firm being sold is not profitable, lenders may be tough to come by, even if the underlying assets are significantly more valuable than the purchase price.

Loans for business acquisitions or scenarios involving a change of control might be significantly variable from case to case.

Having said that, the following are the primary obstacles you’ll normally face while attempting to acquire a small business acquisition loan.

1. Goodwill Financing

The term “goodwill” refers to the difference between the purchase price and the resale or liquidation value of corporate assets after any obligations secured by the assets are paid off. It is the profit that the business is predicted to make in the future over and above the existing worth of its assets.

The majority of lenders are uninterested in financing goodwill.

This essentially increases the required down payment for the sale and/or the procurement of vendor financing in the form of a vendor loan.

Vendor support and Vendor loans are extremely common components of a small business transaction.

If they are not expressly included in the terms of sale, you may wish to inquire whether the vendor would consider offering support and financing.

There are several compelling reasons why asking the question may be worthwhile.

To maximize the sale price, which will almost certainly include some goodwill, the vendor will offer to finance a portion of the transaction by allowing the buyer to pay a portion of the purchase price over a predetermined period of time via a structured payment plan.

Additionally, the vendor may provide transition help for a specified length of time to ensure a smooth transfer.

The combination of vendor support and financing generates a positive vested interest in assisting the buyer in effectively transitioning all aspects of ownership and operations.

Failure to do so may result in the vendor receiving less than the full proceeds of the sale in the future if the business suffers or fails under new ownership.

This is typically a very enticing feature to prospective lenders, as it significantly reduces the danger of loss during transfer.

This directly addresses the next finance concern.

2. Threats to Business Transition

Is the new owner capable of running the firm in the same manner as the prior owner? Will the new owner’s customers continue to do business with him? Is there a unique skill set that the prior owner possessed that will be tough to reproduce or replace? Will key staff remain with the business following the sale?

A lender must have confidence in the business’s ability to continue operating at or above its existing level of performance. Generally, financial projections must include a cushion for possible transition lags.

At the same time, many purchasers may acquire a business if they believe there is significant growth possible that they can capitalize on.

The trick is to convince the lender of your business’s development potential and ability to deliver superior results.

3. The Difference Between an Asset Sale and a Share Sale

Many sellers choose to sell their business’s stock for tax purposes.

However, unless otherwise specified in the purchase and sale agreement, any outstanding and prospective future liabilities relating to the continuing concern business will fall on the buyer.

Due to the difficulty of evaluating possible business liability, there may be a greater perceived risk when reviewing a small business acquisition loan application tied to a share purchase.

4. Market Risk

Is the enterprise operating in a developing, mature, or declining market segment? How does the business fit within the market’s competitive dynamics, and how will a change in control affect its competitive position?

A lender must be confident in the business’s viability throughout the duration of the business purchase loan.

This is critical for a few reasons. To begin, a consistent cash flow enables a more seamless payback process. Second, a solid-going concern business is more likely to be resold.

If an unforeseen occurrence renders the owner unable to continue operating the firm, the lender will be confident that the enterprise may still earn sufficient profit from sales to repay the existing debt.

Localized markets are significantly easier to analyze for a lender or investor than businesses with a broader global reach. Local lenders may also have some working knowledge of the business and its relative prominence in the local market.

5. Individual Net Worth

The majority of business acquisition loans require the buyer to have at least a third of the total purchase price in cash and a tangible net worth that is at least equivalent to the loan’s remaining value.

According to statistics, organizations that are excessively leveraged are more likely to face financial hardship and default on their business acquisition loan agreements.

The larger the business acquisition loan required, the higher the risk of default.