Business Acquisition Financing: How to Finance the Purchase of an Existing Business
Updated: Sep 24
Buying an existing business can be one of the fastest ways to become a business owner or expand a company you already own.
Instead of starting from zero, you may be acquiring an established operation with customers, employees, equipment, revenue, and a proven track record.
But there is one major question:
How do you finance the purchase of an existing business?
At CPS Business Capital, we help business owners and prospective buyers explore financing options for business acquisitions. Depending on the transaction and the qualifications of the buyer and business, financing may be available for a significant portion of the purchase price.
What Is Business Acquisition Financing?
Business acquisition financing is funding used to purchase an existing business or acquire another company.
The financing may cover more than just equipment and inventory. Depending on the loan program and transaction, the purchase can include assets such as:
Equipment and machinery
Furniture and fixtures
Inventory
Real estate
Customer relationships
Intellectual property
Goodwill and other business assets
This is important because much of the value of an established business may not be represented by physical assets alone.
SBA Loans for Buying a Business
SBA-backed financing is one of the best-known financing structures used for qualifying small-business acquisitions.
An SBA 7(a) loan can potentially be used to finance the purchase of an existing business, including eligible acquisition costs and goodwill.
One reason SBA financing is frequently considered for acquisitions is the longer repayment period available compared with many short-term business financing products. When commercial real estate is part of a qualifying transaction, the financing structure and applicable terms can differ from an acquisition involving only business assets.
SBA financing does, however, involve underwriting, documentation and eligibility requirements. Approval is not based simply on the asking price of the business.
What Do Lenders Look At?
When financing an acquisition, lenders generally need to evaluate both sides of the transaction:
The business being purchased and the person buying it.
Important factors can include:
Historical business revenue
Profitability and cash flow
Existing business debt
Business and personal tax returns
Buyer's credit history
Buyer's relevant management or industry experience
Available equity or down payment
Purchase price and valuation
Debt-service capacity
Terms of the purchase agreement
The fundamental question is whether the acquired business is expected to generate enough cash flow to support its operations and the proposed acquisition debt.
How Much Down Payment Is Needed to Buy a Business?
There isn't one down-payment requirement that applies to every acquisition.
The amount of equity a buyer needs can depend on the loan program, lender, transaction structure, business performance and other underwriting factors.
In some transactions, seller financing may also be incorporated into the deal structure. However, the treatment of seller financing varies by lender and loan program and should be reviewed before assuming it will satisfy an equity requirement.
This is why financing should be discussed before finalizing the structure of a purchase.
Why Cash Flow Matters So Much
A profitable business isn't necessarily the same thing as a financeable business.
Lenders generally want to understand the company's available cash flow after considering normal operating expenses and other obligations.
For example, a company may generate substantial annual sales but have relatively thin earnings. Another company with lower revenue may generate stronger cash flow relative to the amount being borrowed.
For acquisition financing, cash flow can be more important than revenue alone.
What If Real Estate Is Included?
A business acquisition can become more complex when the transaction includes commercial real estate.
Imagine purchasing a restaurant, manufacturing company, retail operation or other business where the seller owns both the operating company and the building.
The transaction could involve:
Business value + equipment + inventory + real estate.
That can affect the valuation, collateral, loan structure, required documentation and potentially the repayment period.
CPS Business Capital can review the complete transaction rather than looking only at the business purchase price.
Don't Wait Until You've Signed the Purchase Agreement
One of the most useful steps a prospective buyer can take is to investigate financing early.
Before committing to a purchase, you should have a reasonable understanding of:
How much financing may be available
How much cash you may need
Whether the business's cash flow supports the proposed debt
What documentation will be required
Whether the proposed purchase structure works for the financing program
Early financing discussions can also identify potential problems while there is still time to address them.
Already Own a Business? Acquisition Financing Can Help You Expand
Business acquisition financing isn't limited to first-time buyers.
An established business may use an acquisition to enter another market, add locations, acquire competitors, expand its customer base, obtain equipment or capacity, or add complementary products and services.
In some cases, purchasing an established operation can provide a faster route to expansion than building the same capabilities organically.
Thinking About Buying a Business?
You don't have to know which loan program you need before talking with us.
Start with the opportunity.
Tell us:
The purchase price
What you're buying
Whether real estate is included
The company's approximate revenue and cash flow
How much you're prepared to invest
Your experience with the business or industry
CPS Business Capital can review the transaction and help identify financing options that may fit the acquisition.
Ready to Explore Your Financing Options?
If you're considering buying an existing business, contact CPS Business Capital before you finalize the deal.
We'll help you evaluate the financing side of the transaction, understand the documentation you'll need, and explore available funding options.
CPS Business CapitalBusiness Financing for the Next Stage of Your Business
Visit www.cpsbizcapital.com to get started.
Financing is subject to lender approval, underwriting requirements, program eligibility and availability. Terms and conditions vary by lender and transaction.
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