Buying a business is a great way to grow your client base, increase your productive capacity, and build the value of your company. However, unless you can pay cash for your acquisition, you will require some financing to be successful. Keeping in mind that you will most likely have to cover some of the purchase prices with your own money, here are four types of financing typically used in business acquisitions.
- A loan secured by fixed assets
Buying a business often includes the purchase of real estate and equipment. Because fixed assets such as these tend to maintain their value over time, they can be used as collateral for a loan. To take advantage of this, entrepreneurs typically take out a loan from a bank or other financial institution using the fixed assets of the company they are purchasing as collateral.
- Boost your flexibility with mezzanine financing
If you’re looking to buy a business but have insufficient or no tangible assets to secure conventional financing and don’t want to dilute your ownership, then mezzanine financing could be right for you. This form of financing offers flexible terms and requires little or no collateral. However, mezzanine financing needs a higher return for the lender than a loan secured by fixed assets.
- Raise additional equity
Depending on your situation and the amount of money you need to raise, you can seek an equity investment from a venture capitalist, private equity investor or angel investors. Your new investor(s) will become a major partner, taking an ownership stake in your company in exchange for a significant injection of capital.
- Obtain financing from the seller
You may also be able to obtain financing from the existing owner of the business you want to acquire.
In what is called vendor take-back financing, the seller will provide a loan instead of receiving cash for a portion of the purchase price that is then paid back over time.
Regardless of the type of financing, you have in mind, advisors such as your banker, accountant, and a business consultant can provide invaluable advice on how to finance your purchase and optimize the transaction from a taxation perspective.