Buying an existing business can give you a head start with an established customer base, revenue stream, and operations, but acquiring a business typically requires significant upfront capital. Understanding your financing options can help you determine how much you may need to contribute now, what type of loan may fit the deal, and how to structure the purchase.
Common ways to finance a business acquisition include SBA 7(a) loans, conventional bank financing, seller financing, and investor capital. Depending on the transaction, buyers may combine multiple funding sources to complete the purchase.
Before approaching a lender or negotiating with a seller, take the time to understand both your financial position and the business you're considering. Lenders may evaluate your credit, available capital, repayment ability, and the financial health of the business you're acquiring.
A few steps worth taking early in the process:
Check your credit profile: Most acquisition financing, especially SBA loans, weighs the buyer's personal credit history alongside the target business's financials.
Request financial documentation: Ask for at least two to three years of tax returns, profit and loss statements, balance sheets, and cash flow statements to get a clear picture of the target business's finances.
Obtain a business valuation: An outside valuation helps confirm the asking price is reasonable and gives lenders a benchmark to work from.
Estimate your available capital: Determine how much of the purchase price you can contribute and how much you'll need to finance. Down payment requirements vary depending on the lender, loan type, and transaction.
Talk to a lender before you negotiate: A commercial banker who regularly works with business acquisitions can help you understand which financing options you may qualify for before you make an offer.
Working through these steps before you're deep in negotiations will help you move faster once you find the right business, and doing so can also put you in a stronger position at the negotiating table.
Most business acquisitions can be financed through just one option or a combination of several: SBA 7(a) loans, conventional bank financing, seller financing, or outside investor capital. Many buyers combine two or more of these, such as an SBA loan paired with a seller note, to cover the full purchase price while limiting how much of their own cash they need to put up.
The SBA 7(a) loan is the U.S. Small Business Administration's primary business loan program and can be used to finance a complete or partial change of ownership. The SBA doesn't lend money directly; it guarantees a portion of the loan issued by a participating lender, which reduces the lender's risk and often makes approval more accessible for buyers who might not qualify for a conventional loan alone.
Key features of SBA 7(a) loans for acquisitions typically include:
Loan size: Loan amounts up to $5 million, which covers many small and mid-sized business purchases.
Lower down payment requirements: Down payments are often in the 10% to 20% range, which is lower than what many conventional business loans require.
Potential longer repayment terms: While typical SBA 7(a) repayment terms are 10 years or less, it is possible for repayment terms to extend up to 10 years for a business acquisition, or up to 25 years if the purchase includes commercial real estate, which can keep monthly payments manageable.
Rate caps: Interest rates are subject to SBA maximums, although the rate a borrower receives is negotiated with the lender.
The application process can be more document-intensive than conventional financing, and closing may take longer, so it's worth starting the SBA process as early as possible.
A conventional business term loan is financing issued directly by a bank without an SBA guarantee. Conventional financing may offer a faster, more streamlined process, but qualification requirements can be more stringent. Depending on the transaction, lenders may require stronger financials, additional collateral, or a larger equity contribution than other financing options. Buyers with an established banking relationship, strong credit, and a well-documented target business are often good candidates for this route.
Depending on the transaction, buyers may also use bridge financing to cover a temporary funding gap. A bridge loan is a short-term financing option designed to cover a gap, such as closing on the acquisition before long-term financing or an SBA loan has fully funded, or before proceeds from another asset sale come through. Bridge loans usually carry higher interest rates than term financing and are meant to be repaid or refinanced within a matter of months, so they work best as a temporary bridge rather than a long-term financing solution.
With seller financing, the business owner selling the company agrees to finance part of the purchase price themselves. The buyer makes a down payment and then pays the seller back over time, with interest, through a promissory note, rather than borrowing that portion from a bank. Seller financing is often used to bridge the gap between a buyer's available capital and the total purchase price, and it can be combined with an SBA or conventional loan.
Seller financing can make a deal easier to structure and can also indicate that the seller is willing to remain financially invested in the transaction. It comes with some downsides worth weighing carefully, however:
Potentially higher costs: Sellers may charge higher interest rates than a bank would or ask for a larger down payment to offset their risk.
Shorter repayment terms: Repayment periods on seller notes are often shorter than a bank loan term, which can mean higher monthly payments.
Ongoing seller involvement: Some sellers stay involved in the business, whether through a consulting arrangement or a seat on the board, until the note is paid off, which can limit how much control the buyer has early on.
Not always available: Not every seller is willing or financially able to finance part of the sale, which means this option isn’t available for every deal.
Risk if the business underperforms: If the business underperforms after the sale, the buyer remains responsible for the note, and disputes over the note can sometimes lead to legal complications.
Investor financing involves bringing outside capital into the business acquisition in exchange for equity ownership or a share of future profits. Instead of taking on additional debt, the buyer gives up partial ownership in exchange for the capital needed to complete the purchase. Depending on the size and structure of the acquisition, investors may include private equity firms, individual investors, or other sources of equity capital.
This route can make sense for larger acquisitions or buyers who want to preserve cash flow by avoiding loan payments, but it comes with its own trade-offs:
Loss of full ownership: Bringing in investors means giving up a percentage of ownership and, often, some degree of control over business decisions.
Profit-sharing expectations: Investors typically expect a return on their investment, whether through profit distributions, a future sale, or both, which can sometimes be more expensive over time than the interest on a loan.
Potential for misaligned priorities: Investors may have a say in major decisions, from hiring to strategic direction, which can create friction if the buyer and investors don't see eye to eye.
Financing an acquisition is a significant commitment, but buying an established business may offer advantages over starting a company from the ground up:
Established cash flow and financial history: An existing business comes with a track record of sales, expenses, and profitability, which makes it easier to forecast performance and secure financing than for a startup with no history.
Existing customer base: A business with loyal customers, brand recognition, and an existing customer base can shorten the time it takes to generate revenue.
Trained staff and established operations: Buying a business often means retaining trained employees, established vendor relationships, and operational systems that would otherwise take years to build.
Potentially lower startup uncertainty: An acquisition can reduce some of the uncertainty associated with launching a new venture because the business model has already been established in the market.
Established brand and reputation: Buyers can often build on an established brand rather than spending years building awareness and credibility from scratch.
There isn't one financing option that's right for every business acquisition. The best option depends on factors such as the purchase price, the financial strength of the business, available capital, and the buyer's qualifications. SBA 7(a) loans and conventional business loans are two common options, while seller financing or a combination of financing sources may also be appropriate depending on the transaction.
The amount of capital needed varies based on the purchase price, financing structure, lender requirements, and other costs associated with the transaction. Buyers should consider not only the purchase price but also working capital and other expenses needed to support the business after closing.
Yes. SBA 7(a) loans can be used to finance a complete or partial change of ownership, subject to SBA and lender eligibility requirements.
Yes. Depending on the transaction and lender requirements, buyers may combine financing sources, such as an SBA loan and seller financing, to help fund an acquisition.
The right financing strategy depends on more than the purchase price. Your financial position, the strength of the business you're acquiring, the seller's flexibility, and your plans for the business all play a role.
A commercial banker can help you evaluate your options, understand what you may qualify for, and structure financing around the specific acquisition. Hancock Whitney offers SBA and commercial lending solutions designed to help business owners and buyers move forward with their plans. Contact a Hancock Whitney banker to discuss your acquisition financing options.