What is key in financing a small business acquisition?

A merger and acquisition is considered a very lucrative process that can be very beneficial to all parties involved in the transaction. While most people in Louisiana and elsewhere might think that an acquisition is only for large and successful businesses with a large amount of capital, it is important to understand that any business — no matter the size — has the capability of acquiring another business. With the right business plan and financing in place, even a small business can successfully complete an acquisition of another business.

What is key in financing a small business acquisition? The biggest hurdle that small businesses face is the most obvious, which is the access to capital. Unlike large companies, small businesses do not have the luxury of having such a surplus of capital. Additionally, financing a small business has shifted since the economy has rebounded; therefore, the acquisition strategies for small business are much different than they were a few years ago.

Typically, funding for a small business acquisition today comes from a combination of sources. This includes buyer equity –which comes from their savings or funding from friends and family — commercial loans and seller financing. Recent trends found that a combination of buyer equity and senior debt is becoming a common strategy in small business acquisitions. In the fourth quarter of 2014, this structure accounted for 85 percent of deal structures.

The rise in this type of structure was fairly predictable with the change in economy. This shows an increased willingness of commercial banks to finance buyers who are able to put down a healthy down payment and collateral. This trend could also be a sign that lenders are becoming more confident in both the economy and the growth potential of small businesses seeking to acquire other businesses.

While there are ways to finance a small business acquisition, it is important to consider all options regardless of the current trends. Small business buyers should take the time to understand their funding options in order to ensure that such a transaction can go smoothly and be successfully completed.

Source: Inc.com, “Small Business Acquisition Financing on the Rise: Tips for Buyers,” Bob House, April 9, 2015