Why buy an existing business?
Buying an existing business can be a faster, more secure way for budding entrepreneurs, compared with starting a company from scratch. The stats indicate that 20% of businesses fail in their first year and around 60% will go bust within their first three years.
By buying an existing business with strong cash flow and an established customer base, the risk can be reduced dramatically.
This comes at a cost however, with the cost of buying a profitable business usually far in excess of the cost of starting a new, similar company. That said you’re likely to start seeing a return on your investment immediately.
Buying a business can be a strong alternative to starting a new one
In addition to the reduced risks, there are other important benefits to buying a business. Firstly, all equipment and systems are usually already in place, which can make the process of moving into self-employment much smoother.
Existing companies, or at least the ones worth buying, will have predictable future income. This makes managing your cash flow far simpler. Cash flow is a major cause of business failure, so by having more control over this area will make the risk of failure far lower.
How much can I borrow to buy a business?
The amount you can borrow will depend on several factors. For a new business purchase when you do not already have a similar business already the loan will generally have to be secured.
We can offer larger loans where a residential, Buy to Let or Commercial property or other assets such as machines or vehicles with sufficient equity are available for security.
The loan must be affordable, and as such, the accounts will be closely scrutinised before a judgement can be made on how much you can borrow.
The lender will also look into your previous record before issuing an unsecured business loan and will usually want to see a clear credit history, with no defaults or CCJs (County Court Judgements).
Do I need a deposit?
You don’t always require a deposit when you are purchasing an existing business. Where you have sufficient equity in the security you offer it is often possible to raise the full purchase price. However, you may need some upfront fees for legal costs or valuations.
How do I find the right business to buy?
Often the opportunity to buy an existing business just falls in your lap. It may be that your own or a friends employers are looking to sell or retire and the business is available to buy.
Alternatively you may find a suitable business advertised and make enquiries in that way.
It is important that when you choose to buy an existing business you are confident that you can run it successfully and at least continue with the same success as the current owners.
Normally to achieve this you would already have experience in the same or a similar trade.
Many businesses are built up over a number of years due to the experience of the current owners and it would not be wise to think that this experience counts for nothing and anyone could do it.
This is where careful planning can be important in understanding what training may be available to bring you up to speed. Sometimes the current owner will stay involved for 6 or 12 months while you gain experience.
Types of funding available when a business is being purchased
There are number of options available depending on the circumstances. The type of funding that’s most suitable will depend on a number of factors, and in some cases, a combination of the below options may even be suitable.
The most common types of funding are the following:-
Unsecured Business loans
Business loans can be ideal for those looking to buy smaller companies without a lot of assets. When taking this route, you will usually have to provide security over your assets or property, meaning the security may be at risk of repossession should you fail to keep up your repayments.
Although this increases the risk for you, it does decrease it for the lender and as such may mean that the lender takes a slightly more relaxed view. As such, your chances of being approved will increase if suitable security is offered.
As security is being offered, it may be easier to secure funding in this way without a deposit and the lender may be more lenient about adverse credit.
Secured lending is available for larger loans and we can often offer longer terms than would be possible using unsecured lending.
Due to the extra processing involved in secured lending, including a survey report on the property, these loans can take a little longer to process. Funding is usually available in 3-6 weeks.
Asset finance involves using the assets of a business as security for funding. This type of funding can be used as security in much the same way as a property would be when taking out a secured business loan.
Where you have your own business in the background, we could potentially use the assets of both your current and the new business as security.
In many cases, the funder will purchase the assets from you and you then slowly purchase it back through the agreed monthly repayments.
When taking out asset finance, you are placing your assets at risk should you fail to keep up repayments and could lose them in such circumstances.
Where there are significant takings each month on delayed payment terms, invoice finance may be used to partially fund a business purchase. It works by allowing you to borrow against the future income, with funds being released when the invoice is issued, rather than when it is paid.
Invoice finance applications are judged on the strength of the business that are to pay the invoice as well as your own business. As such, you will need a clear breakdown of the customers of the business.
Where you’re buying the premises of the business in addition to the business, a commercial mortgage could be the best option for you.
Commercial mortgages are available up to 70% of the property value, and in some cases, we can offer 60% to 70% of the going concern value – the value of the business and property combined.
Commercial mortgage rates are generally lower than those offered on business loans and the terms longer. The underwriting is generally more involved and as such applications can take 6-8 weeks or longer to complete.
Sometimes it is possible to reach an agreement with the seller to accept part of the payment over future months or even years especially if the sellers are retiring and it is beneficial to them to accept payments over a number of years.
With expert assistance you could potentially structure an agreement which is favourable to both the seller and yourself which could reduce the amount of money you need to raise upfront.
Which lenders offer loans for business purchases?
There are a lot of options here, and they depend on the type of financing you’ll be taking. One option is to look at High Street Banks, who can often help with both secured and unsecured loans, asset finance and invoice finance. However, High Street Banks can sometimes not have the appetite to lend to the type of business you are buying or have much stricter criteria which you cannot meet.
However, there are many new Challenger Banks who are often happy to look at business acquisition funding, as well as crowdfunding and specialist commercial lenders who take a completely different view.
Knowing which lenders to approach and how to present an application which is likely to be accepted is critical to your success. This is where a specialist broker like ABC Finance can be an important partner.
Advantages of buying an existing business
There are a number of advantages to buying an existing business rather than starting a new one. Here is a look at the pros and cons of this approach:
- Buying a profitable business means you will be able to enjoy immediate income and cash flow
- Established trading businesses will have an existing customer base to market
- Processes and supplier lines will already be in place and operating well
- You can be secure in the knowledge that your business is profitable and has suitable demand
- A strong reputation will stay with the business
- You will pay a premium for a strong business
- There is a danger that some customers may no longer work with you once the previous business owner has moved on
- Any previous reputation or customer service issues will become your problem
- You will be bound by any contracts agreed to by the previous owner
- Staff may be resistant to a new way of doing things
What Information do I have To provide?
When applying for a loan to buy a business, you will need to provide certain information to the lender to enable them to make a lending decision. Although the exact documentation needed will vary from application to application, the lender will usually need the following:
- A fully completed application form
- Financial projections outlining expected future trade
- Two years’ accounts for the business
- Three months bank statements from the business (in some cases)
- Six months’ personal bank statements
- A CV detailing any relevant experience
- A detailed business plan
Evaluating a business you intend to purchase
A lender will always undertake a detailed underwrite of any application before agreeing to release funds. It’s important that you take a similar approach and conduct your own due diligence before making an offer.
The main areas to consider are the financial performance, how the business is run, the reputation, company culture and sustainability of the business.
Sustainability of the profits are a key issue. It’s important to understand where to turnover came from and whether that’s likely to continue. Understanding any large contracts, when they end and whether new contracts have been taken on will give you a greater insight into likely future financial performance.
Do you lend on larger takeovers, mergers & MBOs?
Yes, we can fund much larger acquisitions, mergers and MBOs (Management Buyouts) but this type of funding is quite different to smaller business purchases. We can fund large acquisitions on a bespoke funding basis.
You can find out further details on our offering by talking through your circumstances with one of our advisers.