To get a business acquisition loan, you’ll need to:
1. Evaluate the business’s worth
Requesting a business valuation can determine a company’s worth, helping lenders assess how much capital they feel is appropriate. For example, you might have difficulty convincing a lender to approve your $350,000 acquisition loan if the business you want to purchase has a value of only $15,000. In contrast, buying a business valued over $100,000 with a steady income stream could reassure lenders that you can likely handle the loan payments.
While business valuations can be calculated in different ways, here are three popular options:
- Market-based valuation: This method compares your business to similar companies in your industry and works best when your services, prices and operations are standard for your industry.
- Asset-based valuation: This approach requires a deeper analysis of a business’s assets and its net worth. A restaurant, for example, may have expensive kitchen appliances, shatter-resistant dishes, pricey booths and tables and a large inventory of vintage wine.
- Income-based valuation: Here, the focus is on how much cash flow your business might generate in the future. While there’s no way to assure this, a solid financial history with an upward projection for revenue is a good sign for lenders.
2. Get a signed letter of intent
It’s common practice for the buyer and the business seller to sign a letter of intent outlining the specific steps both parties will take to move forward with the arrangement.
While a letter of intent may not be legally binding, it can show lenders you’re serious about moving forward with the sale. Lenders may hesitate to approve your business acquisition loan if it seems like you and the seller aren’t on the same page.
An attorney can help draft an SBA or standard letter of intent, which both parties will sign.
3. Review your credentials
While specific business loan requirements can vary by lender and loan type, lenders typically review the following criteria when assessing your loan application:
- Credit score: Having a good personal and business credit score can increase your chances of getting approved for a business acquisition loan. While some lenders accept scores as low as 600, a higher score will likely unlock better rates and more flexible terms.
- Time in business: Many lenders require your company to operate for at least one to two years before you can qualify for business acquisition financing, making this a better option for an existing business owner purchasing a second business or buying out a partner.
- Annual revenue: Lenders generally want to see your company generating a steady cash flow to reassure them you can handle debt repayments. While having an annual revenue of around $100,000 or higher could strengthen your loan application, lenders like Taycor Financial don’t impose minimum revenue requirements.
4. Compare lenders
After finding business acquisition lenders that fit your criteria, you can dive deeper to learn about their fees, rates, customer support and more. Reading business lender reviews in advance can help ensure a lender is legit before you sign the dotted line. Some lenders also offer perks, like free business coaching, rewards programs and early payoff discounts.
5. Gather necessary documents
Organizing your business paperwork in advance can help ensure you have everything you need before applying. While exact requirements vary by lender, here are some common loan documents many lenders require:
- A recent business valuation
- Recent tax returns for the business you’re planning on purchasing
- A current profit and loss (P&L) statement from the existing business
- A proposed bill of sale, which must include the terms of sale
- The asking price and the schedule of inventory, equipment and furniture
- Projected financial statements, detailing a one-year income projection with a written explanation of how you plan to reach it
- Information about the business’s ownership and any affiliations
- Copies of business certifications and licensing
- Your personal and business tax returns from the previous three years
- A business plan outlining how you plan to use the funds
6. Apply and review offers
You can usually submit a business acquisition loan application online, although some traditional banks may require an in-person visit to finalize the paperwork.
If approved, make sure to thoroughly review the business loan agreement before moving forward. Now is the time to ask questions about repayment schedules, interest rates, additional fees and acceptable ways to use the funds.