So you’re wondering how to finance a small business purchase? If you’re new to buying businesses, and you don’t happen to have a spare £50,000 or so to hand, your first question is likely to be, “Can I get a business loan to buy a business?”
It can seem incredibly daunting, but there are plenty of options out there to suit entrepreneurs from every walk of life. Take your time, think things through, and you’ll soon be living your dream of business ownership, supported by a finance option that’s right for you.
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Advantages of purchasing an existing business
Existing businesses that have been put up for sale, perhaps because the owners are retiring or looking to go in a new direction, are a finance-friendly way to get started in business.
An existing business not only has premises that are up to standard, but it usually comes with at least the option to purchase the fixtures and fittings, if not a sale price that already includes these. It also comes with an established brand, a known presence, and a customer base you don’t have to build yourself. While the upfront costs of purchasing an existing business may be steep, there are several vital costs that you won’t have to meet in addition to your initial outlay.
Not only will this save you money in the long run, but it will reassure lenders who might be nervous about financing an unknown entrepreneur. Taking over an established business is far less risky than setting up something completely new.
Finance options for purchasing an existing business
1. Bank loans
The most obvious form of business finance for many people is visiting your bank for a business purchase loan. As existing businesses will have full financial records available, and a known trading history, it can be easier to prove to cautious lenders that you are taking on a relatively low risk proposition.
However, bank loans can be time consuming to apply for, especially if you’re looking to enter a niche market, or you’re an untried business person. In both these cases, the likelihood of a refusal is significantly higher. In the current market, with lenders very reluctant to back anything other than absolute certainties, this can make a bank loan to buy an existing business a less reliable idea.
2. Seller financing
If you have a proven track record in the industry you’re looking to enter, and the seller is in no particular hurry y, then you may be able to purchase the business from them in instalments.
However, this will incur legal costs that you’ll be expected to meet, and you’ll still have to pay back the seller if the business fails under your ownership.
Settling into its place in a digital world, crowdfunding has become a very acceptable way to finance business purchases of all sizes, as well as securing working capital to expand an existing business.
One of the best advantages of using crowdfunding to finance a small business purchase is that the whole process is built around creating buzz, meaning you can make people aware of your brand before you’re even in the market, and with very little cost to yourself.
Identifying companies to purchase
Purchasing a small business is about presenting yourself as a safe pair of hands to your investors. Therefore, when you’re looking into potential companies to purchase, you need to consider how each possibility reflects a low-risk proposition.
Established brands with a strong presence and a happy client base should be top of your list, especially if you have relevant sector experience. Lenders and investors see your purchase as a smooth transition – you’ll be stepping into shoes that have already walked the hardest part of the business road.
Deciding which company to purchase, and choosing business loans to buy an existing business is equal parts art and science. The art relates to your personal tastes, ambitions, and motivation for purchasing a business to begin with, while the science deals with the tangible trust points you can offer lenders or investors, as well as any employees and customers you take on when you purchase your new business.
Evaluating a business you intend to purchase
As with any purchase, a full and proper evaluation of the company you intend to purchase is key.
It is often best to have suitably qualified and experienced solicitors and accountants conduct full due diligence for you, but there are some simple questions you should be asking yourself:
1. What is the reputation of this business?
The most accurate answer to this question can usually be found by searching social media for mentions of the company. Do this before visiting their main social pages, as you’ll get a warts-and-all overview of the good, the bad, and the ugly that may not be reflected in the curated comments they allow on their own pages.
2. What is the company culture like?
If you’re taking on the existing staff of a business, this is a vital question to ask, and one you need the answer to. Changing a company’s culture can be incredibly difficult, if not impossible. If you don’t want the additional time, hassle, and expense of replacing an entire team, make sure the culture you’re buying into is one you’re happy to be associated with.
3. What do existing customers expect from this company?
If a company has bought loyalty by offering low prices, think very carefully about whether this is something you want to continue; customers who come for the prices rarely stay when those prices rise.
Acquiring a distressed business
Acquiring the finance to purchase a distressed business, requires considerable experience, patience, an even temper, and a creative mindset.
You’ll be rebuilding trust, often with staff and suppliers, as well as customers, dealing with people who are angry, hurt, and resentful, who may feel they have been betrayed and let down, and will be taking on the responsibility to identify new business routes, and guide the company forwards.
Lenders and investors willing to finance the purchase of a distressed business will want to see an owner with a proven track record, who can offer firm evidence of the right mindset and temperament for the task they’re undertaking. If you can offer that, however, turning around a failing business can be incredibly rewarding.