Buying another business can be a game-changer for growth, giving you more customers, a bigger market share, and additional revenue. Studies show that the global value of mergers and acquisitions hit $4.7 trillion in 2022, proving how popular this option is for expanding businesses. However, the key challenge for many buyers is figuring out how to finance the purchase.
This guide breaks down some simple, practical ways to fund your acquisition and includes tips to help you along the way. Whether you’re new to business ownership or experienced in the field, knowing your financing options is essential for success.
What is Acquisition Financing?
Acquisition financing is the money you borrow or secure to buy an established business. It helps you pay for the purchase without draining all your savings. It’s used for deals of all sizes, from small local businesses to large-scale acquisitions.
For example, a small company buying a competitor can use a loan or seller financing (where the seller helps fund the purchase). On a bigger scale, deals like Amazon’s $13.7 billion purchase of Whole Foods rely on a mix of debt and equity financing. But no matter the size, the idea is the same: acquisition financing gives buyers the funds to grow.
Common Ways to Finance a Business Acquisition
1. Traditional Bank Loans
Banks are a go-to resource when purchasing a business. They offer loans with set repayment terms, generally lasting 5 to 10 years. To get approved, banks often check your credit score, the business’s history, and whether the business has enough revenue to make payments.
Example
If you’re buying a small bakery for $500,000, a bank might fund $400,000, requiring a 20% down payment of $100,000. You’ll also need to provide paperwork like tax returns and financial statements to show the business is profitable.
Pros
- Lower interest rates compared to other options.
- Predictable monthly payments.
Cons
- Strict eligibility requirements.
- The application process can take time.
2. SBA Loans (Small Business Administration)
The SBA offers 7(a) loans for business acquisitions, which are a popular option because of their lower interest rates (8–10%) and longer repayment periods (up to 10 years). These loans are designed to support small business purchases.
Key Points
- Buyers usually need to make a 10–25% down payment.
- To qualify, the business must meet specific size requirements (e.g., annual revenue under $41 million).
You’ll need to submit a business plan and the current owner’s financial records.
SBA loans work well for buyers who lack the full amount upfront but have a solid plan for success.
3. Seller Financing
Also known as “owner financing,” this is when the seller agrees to let you pay part of the purchase price over time, often with some interest included. Sellers may ask for a down payment upfront, and you’ll repay the remaining amount in installments.
Example
Say you’re buying a coffee shop for $300,000. The seller agrees to finance 50%, so you only need to pay $150,000 upfront through savings or another loan.
Pros
- Easier approval process compared to bank loans.
- Flexible terms that can be customized.
Cons
- Seller financing depends on the seller’s willingness and financial situation.
- Terms need to be clearly negotiated to avoid misunderstandings.
4. Private Equity or Investors
For bigger deals or fast-growing companies, private equity firms or venture capitalists are another way to secure funding. They invest in your business in exchange for a share of ownership.
Benefits
- These investors often bring expertise in growth and operations.
- You don’t have to pay back the money if the business struggles.
Challenges
- You give up some control of your business.
- Investors may want a say in daily decisions or strategies.
5. Creative Options like ROBS (Rollovers as Business Startups)
If traditional or seller financing isn’t an option, you could use retirement savings through a ROBS account. This method avoids penalties and taxes, but it’s risky if the business doesn’t succeed.
Example
Rolling over $200,000 from a 401(k) could fund your down payment or cover the full purchase price.
Warnings
- ROBS requires compliance with strict IRS rules.
- Using your retirement savings puts your future finances at risk if the venture fails.
Tips for Navigating M&A Financing
1. Get a Clear Business Valuation
Work with an expert to figure out how much the business is really worth based on its revenue, assets, and competition.
2. Don’t Rely on One Funding Source
Many buyers combine options, like using an SBA loan for the bulk of the cost and seller financing to cover the rest. Hybrid approaches can reduce risk and offer more flexibility.
3. Plan for Post-Purchase Costs
Budget for extra costs like renovations, marketing, or training after the sale is finalized. These expenses can impact cash flow early in the process.
Putting the Pieces Together
Financing a business acquisition doesn’t have to feel overwhelming. Think of it like solving a puzzle, where each piece—whether it’s an SBA loan, seller financing, or an investment partner—is a step toward building the future you envision.
From my experience, the key isn’t just finding the funding but really understanding why this business fits your goals and how you’ll make it thrive once it’s yours. For example, blending multiple funding sources, like combining a loan with seller financing, can keep your cash flow steady while easing the upfront financial pressure.
It’s also essential to surround yourself with trusted advisors, like accountants or business brokers, who can guide you through the process and offer fresh perspectives. To me, the most exciting part is how an acquisition gives you a chance to take something established and make it even better with your unique ideas and leadership.
Don’t be afraid to dream big—but remember, success happens step by step. With the right plan, a bit of creativity, and a lot of persistence, you’ll turn this opportunity into something truly rewarding. Whether it’s your first acquisition or your fifth, believe in your ability to steer it toward success.