Buying an established business lets an owner step past the startup phase : inheriting customers, staff, and cash flow from day one. Acquisition financing covers the purchase price, and often working capital to stabilize the transition.
The SBA 7(a) program is a common vehicle for small-business acquisitions, but other structures exist depending on deal size, buyer profile, and the target's financials.
How it generally works
Acquisition funding is sized against the target business's demonstrated cash flow, not just its assets. Lenders and funders scrutinize historical financials, customer concentration, margins, and the durability of earnings.
Buyers are typically expected to contribute an equity portion, and sellers may carry back part of the price as seller financing : a common feature that also signals the seller's confidence in the business.
Common uses
- Purchasing the stock or assets of an existing business
- Partner buyouts and changes in ownership
- Franchise purchases of established brands
- Acquisition-related working capital
- Refinancing the target company's debt as part of the transaction
What funders and lenders commonly evaluate
- Three years of the target's financial statements and tax returns
- Quality and concentration of the customer base
- Buyer's industry experience and management capability
- Buyer's equity contribution and personal financial profile
- Reasonableness of the purchase price relative to demonstrated earnings
Potential advantages and trade-offs
Advantages: acquiring proven cash flow reduces the risk profile versus a startup, and proven operations can support larger funding amounts.
Trade-offs: diligence is demanding, the process takes months, and the buyer remains responsible for unknown liabilities discovered after closing if diligence is incomplete.
How to prepare before pursuing an acquisition
Assemble the target's financials early, define your equity contribution, and build a written plan for operating the business post-close. Lenders fund well-documented plans far more readily than informal intentions.