Why Buy a Business

Buying a Business to Get Acquisition Capital

Financing is a critical factor in new business ownership. Strangely enough, lenders who won't lend money for a startup concept are happy to lend money if you are buying an existing business. Here's why buying a business to get acquisition capital makes sense.

Financing is a major obstacle to small business ownership.

In today's economy, entrepreneurial spirit and the desire to own a small business isn't enough. You need cold, hard cash and a proven game plan before lenders will even consider giving you a loan for a business venture.

Finance companies are especially averse to lending to small business startups. They've read the statistics on startups and decided that there are much more creative ways for them to flush their lending capital down the drain.

Lenders in the current economic climate are more willing to finance entrepreneurs who are buying an existing company than they are to finance business startups. There are a lot of reasons for that, but most revolve around the fact that an existing company takes the guesswork out of the lending decision. If you're considering small business ownership, here are several reasons why buying a business to gain acquisition capital may be your best bet.

• Cash flow. Lenders finance business purchases based on the assumption that the business will earn enough revenues to keep up with principal and interest payments. While there's no guarantee that a startup will meet their revenue requirements, existing businesses have cash flow and are more appealing to lenders.
• Financial history. Although lenders always require a business plan, they are more impressed by actual financials. Startups don't have them. But buying a business means that you will be able to produce solid financial data and trend information to back up the assertion that the company is a viable business enterprise.
• Assets. Lenders love assets because they provide security. If your company tanks, the lender can leverage their collateral position to come out whole. Your lender will want collateral regardless of whether you're launching a startup or buying an existing company. But they prefer security interests in collateral that is already owned by the business.
• Intangible value. Unless you're overpaying for the business, an established small business has a certain intangible value that may not have been taken into consideration in the sale price. As you increase the company's intangible value, you create a bumper that can protect the lender's investment when you exit the business.
• Proven model. Most lenders place a high value on a proven business model. They understand that there is a big difference between a borrower who thinks they have a successful business concept and one that can prove his company is capable of turning a profit.

Share this article

Additional Resources for Entrepreneurs

Lists of Venture Capital and Private Equity Firms

Franchise Opportunities

Contributors

Business Glossary