Business Acquisition Loans
Business acquisition loans, or “change of control” financing conditions, can vary to a great extent from case to case. Meeting the criteria for small business acquisition loans may be an ordeal at times.
When businesses being sold are extremely profitable, the selling price will probably reflect a considerable amount of goodwill, which can be very difficult to finance. On the other hand, it may be difficult to find lenders to sell businesses that are not making money. It may be difficult even if the underlying assets being purchased are worth much more than the purchase price.
There are certain difficulties that borrowers will have to overcome in order to secure a small business acquisition loan. One difficulty is financing goodwill. Goodwill represents the future profit the business is estimated to make beyond the existing value of the assets. A large amount of lenders have no interest in financing goodwill. This in effect, raises the amount of the down payment necessary to complete the sale and/or the acquisition of some funds from the vendor.
Another problem with securing business acquisition loans is business transition risk. This involves questions such as whether new owners will be able to run the business as well as the previous owners, and whether key employees will continue to work and the like. To acquire acquisition loans, owners have to convince lenders of the growth potential.
Whether the business being sold is in a rising, mature, or declining market segment, will also affect acquisition loans. An important consideration here is that whether a change in control will strengthen or weaken the business’s market position. Lenders have to be certain that the business can be successful for at least the period the business acquisition loan will be due. This is essential for two reasons. Firstly, a constant cash flow will clearly facilitate a smoother process of repayment. Secondly, a strong going concern business has a higher probability of resale.
Mainly, business acquisition loans require borrowers to be able to provide at least a third of the whole purchase price in cash, with a remaining tangible net worth at least equivalent to the remaining value of the loan. Statistics prove that over leveraged companies are more likely to suffer financial pressure and default on their business acquisition loan obligations.
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