If You Need a Bank Loan to Acquire a Business, Then it Pays to be a Financing Realist
If You Need a Bank Loan to Acquire a Business, Then it Pays to be a Financing Realist
When you're eyeing an acquisition that requires bank financing, figuring out how to secure that financing is crucial. Without it, all your efforts and arrangements can fall apart. That's why addressing financing issues upfront—before locking in any deal terms—should be your priority. If securing financing is essential for the acquisition and you're unable to get it, what’s the point of moving forward?
If your deal hinges on external financing, it’s essential that the acquisition meets the bank's requirements, not the other way around. The bank's acquisition loan impacts nearly every critical aspect of your purchase. Deals can derail quickly if lending due diligence is overlooked from the start.
Imagine this scenario: you and the seller agree on the terms, hire a lawyer to draft a purchase agreement, order a business valuation, and set a closing date. Then you think financing will be a breeze because the cash flow looks good on paper. Only to find out that the deal structure, payment terms, purchase agreement language, and timelines all need significant adjustments. The bank may want to order the valuation and could require a seller guarantee or grantor agreement that you weren’t prepared for.
External financing plays a huge role in shaping acquisition terms and structures. It dictates loan amounts, cash injection requirements, promissory note terms, and more. Financing affects nearly every part of the deal, including payment structures, purchase agreements, collateral considerations, equity injections, and lien requirements. If you’re qualifying for an SBA loan, you’ll need to meet specific SBA and individual lender criteria. Conventional lenders have their own set of guidelines, which can be more flexible or stricter than those of the SBA. Both buyers and sellers should focus on due diligence related to financing to develop a viable deal structure that fits lending requirements.
Consider addressing these financing issues early, even if you’re not ready for full pre-qualification. Gaining an understanding of the financing landscape early on helps clarify the purchase amount, available loan programs, payment structures, terms, contingency requirements, down payment options, and any potential red flags. By tackling these issues early, you may find time to make necessary adjustments. You might have one approach in mind, but exploring alternative strategies can help you sidestep down payments, seller guarantees, or seller financing.
Acquisition financing should be a key topic during your initial strategy discussions to enable more informed decision-making.
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