| Qualifying for a small business acquisition loan can be | | | | possess a specific skill set that will be difficult to |
| quite an ordeal to say the least. | | | | replicate or replace? Will the key employees remain |
| If the business being sold is very profitable, the selling | | | | with the company after the sale? |
| price will likely reflect a significant amount of goodwill | | | | A lender must be confident that the business can |
| which can be very difficult to finance. | | | | successfully continue at no worse than the current |
| If the business being sold is not making money, lenders | | | | level of performance. There usually needs to be a |
| can be difficult to find even if the underlying assets | | | | buffer built into the financial projections for changeover |
| being acquired are worth substantially more than the | | | | lags that can occur. |
| purchase price. | | | | At the same time, many buyers will purchase a |
| Business acquisition loans, or change of control | | | | business because they believe there is substantial |
| financing situations, can be extremely varied from case | | | | growth available which they think they can take |
| to case. | | | | advantage of. |
| That being said, here are the major challenges you'll | | | | The key is convincing the lender of the growth |
| typically have to overcome to secure a small business | | | | potential and your ability to achieve superior results. |
| acquisition loan. | | | | >>> Asset Sale Versus Share Sale |
| >>> Financing Goodwill | | | | For tax purposes, many sellers want to sell the shares |
| The definition of goodwill is the sale price minus the | | | | of their business. |
| resale or liquidation value of business assets after any | | | | However, by doing so, any outstanding and potential |
| debts owing on the assets are paid off. It represents | | | | future liability related to the going concern business will |
| the future profit the business is expected to generate | | | | fall at the feet of the buyer unless othewise indicated |
| beyond the current value of the assets. | | | | in the purchase and sale agreement. |
| Most lenders have no interest in financing goodwill. | | | | Because potential business liability is a difficult thing to |
| This effectively increases the amount of the down | | | | evaluate, there can be a higher perceived risk when |
| payment required to complete the sale and/or the | | | | considering a small business acquisition loan application |
| acquisition of some financing from the vendor in the | | | | related to a share purchase. |
| form of a vendor loan. | | | | >>> Market Risk |
| Vendor support and Vendor loans are a very | | | | Is the business in a growing, mature, or declining market |
| common elements in the sale of a small business. | | | | segment? How does the business fit into the |
| If they are not initially present in the conditions of sale, | | | | competitive dynamics of the market and will a change |
| you may want to ask the vendor if they would | | | | in control strengthen or weaken its competitive |
| consider providing support and financing. | | | | position? |
| There are some excellent reasons why asking the | | | | A lender needs to be confident that the business can |
| question could be well worth your time. | | | | be successful for at least the period the business |
| In order to receive the maximum possible sale price, | | | | acquisition loan will be outstanding. |
| which likely involves some amount of goodwill, the | | | | This is important for two reasons. First, a sustained |
| vendor will agree to finance part of the sale by | | | | cash flow will obviously allow a smoother process of |
| allowing the buyer to pay a portion of the sale price | | | | repayment. Second, a strong going concern business |
| over a defined period of time within a structured | | | | has a higher probability of resale. |
| payment schedule. | | | | If an unforeseen event causes the owner to no longer |
| The vendor may also offer transition assistance for a | | | | be able to carry on the business, the lender will have |
| period of time to make sure the transition period is | | | | confidence that the business can still generate enough |
| seamless. | | | | profit from resale to retire the outstanding debt. |
| The combination of support and financing by the | | | | Localized markets are much easier for a lender or |
| vendor creates a positive vested interest whereby it is | | | | investor to assess than a business selling to a broader |
| in the vendor's best interest to help the buyer | | | | geographic reach. Area based lenders may also have |
| successfully transition all aspects of ownership and | | | | some working knowledge of the particular business |
| operations. | | | | and how prominent it is in the local market. |
| Failure to do so could result in the vendor not getting all | | | | >>> Personal Net Worth |
| the proceeds of sale in the future in the event the | | | | Most business acquisition loans require the buyer to be |
| business were to suffer or fail under new ownership. | | | | able to invest at least a third of the total purchase |
| This is usually a very appealing aspect to potential | | | | price in cash with a remaining tangible net worth at |
| lenders as the risk of loss due to transition is greatly | | | | least equal to the remaining value of the loan. |
| reduced. | | | | Statistics show that over leveraged companies are |
| This speaks directly to the next financing challenge. | | | | more prone to suffer financial duress and default on |
| >>> Business Transition Risk | | | | their business acquisition loan commitments. |
| Will the new owner be able to run the business as well | | | | The larger the amount of the business acquisition loan |
| as the previous owner? Will the customers still do | | | | required, the more likely the probability of default. |
| business with the new owner? Did the previous owner | | | | |