Overview of Acquisition Financing
Buying an existing business is one of the most powerful paths to entrepreneurship, you get immediate revenue, existing customers, trained employees, and established processes. But financing the purchase requires a different approach than typical business lending. Lenders evaluate the target business's financials, your experience and credit, the purchase price relative to earnings, and the deal structure. Common funding sources include SBA 7(a) loans, conventional bank loans, seller financing, and combinations of all three.
SBA 7(a) for Business Acquisitions
The SBA 7(a) program is the most popular option for business acquisitions under $5 million. The SBA guarantees up to 75% of the loan, which encourages lenders to approve acquisition deals. Typical terms: 10-year repayment, rates of prime + 2-3%, and only 10-20% down payment required. The catch: extensive documentation including 3 years of business tax returns, a professional business valuation, a personal financial statement, and a post-acquisition business plan. Processing takes 45-90 days.
Real-World Example
A mechanic wants to buy his retiring boss's auto shop listed at $400,000 (generating $120,000/year net income, a 3.3x multiple). He structures the deal as: $280,000 SBA 7(a) loan at 8.5% for 10 years (monthly payment: $3,474), $80,000 seller financing at 6% for 5 years (monthly payment: $1,547), and $40,000 personal savings for the down payment. Total monthly debt service: $5,021 against $10,000/month net income. Debt service coverage ratio: 2.0x, well within lender requirements. The seller note also showed the lender that the seller has confidence in the business.
Acquisition Financing vs. Startup Financing
Acquisition financing is significantly easier to obtain than startup financing because the business already has a track record. Lenders can evaluate real financial statements instead of projections. SBA programs are more favorable for acquisitions than startups. Down payment requirements are lower (10-20% vs. 20-30%). Interest rates are better because the risk is lower, you're buying proven cash flow, not an unproven concept. If you're debating between starting from scratch and buying existing, the financing advantages of acquisition are substantial.