I have a potential acquisition opportunity to buy a more successful company than my own fledging one. What are my best funding options?
The business is in the same sector so we have a lot of synergies and it would fast track expansion without management overload. We are just starting to turn out a profit ourselves. What would be the best way to fund an acquisition as an early stage business.
Agree to pay the cost of the acquisition out of the proceeds of the combined company over time.
Small financial boutiques and angels- all depend of your financials and the funding requested.
The answer is family, friends, or self-finance unless this is a solid enough deal to attract an outside investor. There's no way you will get bank financing for this without assets to secure.
A private investor will want:
-- Strong provable profit potential of the combined operation.
-- Scalability. It can be grown substantially in "cookie cutter" fashion.
-- Your proven skill to run such an operation.
-- Synergies within the two operations. Hopefully some strong management members who will work well together.
These are high hurdles, as they should be.
Owner of the business you are buying.
Get a partner. (before speaking with them make sure they sign a non compete and a non-disclosure agreements)
Funding can also come from financing companies that borrow against inventories and more Depends on the industry.
If you can tell us the industry you are in.
Depending on the size of the acquisition you may need a venture company as a partner or financial lender. it will depend on the profitability of the acquisition and whether you need to finance the entire amount or 8f the Seller is providing some 9f the financing. More information is needed including the level of profit of the acquisition and it's length of existence and historical profitability. You can cal me directly to discuss.
Get partners and investors that see the value of the acquisition the way you do.
Determine their level of involvement in the process and roles.
or you can just hire Mike.
Before you jump into the fire, make sure that you do the due diligence properly. Have your attorney and your accountant go over the company with a fine tooth comb. You need to know why the company is for sale. You also need to know what constitutes a fair price and a fair offer.
And remember, you inherit all the good and all the bad from the company so be sure to check out their reputation, especially their online reputation.
Probably the fastest way is to fund with your own money or find an investor to help you out.
Another source is a business loan from your bank. For that you will probably need a solid business plan and the results of the due diligence I mentioned above.
Start with their last 3 yrs of tax returns, your own bank and a visit to 2 or 3 other nearby banks. Ck with local Economic Dev. or IDA office for low interest loans. Do not let each lender run your credit score until you narrow the field. Take their tax returns apart a bit. Find depreciation, find out how much the owner/s paid themselves, were they skimming or paying their home heating bill w/ company funds? Make a Funds Needed list of every $ needed for buyout. Create 3 years Cash Forecast - future - including loan payments. Then decide for sure.
There are several ways to fund the acquisition. Some of the options will depend on the goals of the company you are looking to acquire (i.e. do they want cash, will management remain with the company).
1) Utilize a financial partner: this would involve finding a private equity firm (or similar) that sees the same opportunity in a combined business as you do and that would like to back the enterprise. This would allow you to purchase the company, provide for future fund raising and additional partners to assist in growing the business. The downside is PE firms are driven by returns which can become challenging over time.
2) Seller note: Essentially the seller would provide the acquiring firm with debt to finance the deal. This would be paid off over time.
3) Equity: if the seller is interested in seeing the future return, you may be able to offer equity (stock of the combined business) as consideration.
There are combinations of the above that could allow you to execute on the acquisition as well.
As a experienced SBA Lender I would take a look at SBA loans. It does depend on the size of the loan about the collateralization. SBA rules have changed for loans under $350,000 do NOT require full collateralization and are quick and easy. I did a similar loan recently for a business that was just how you described.
I do agree with Walter on doing your due diligence in your situation.
You don't say what type of business. Professional firms, i.e., CPA, Lawyers, consultants usually pay a multiple of revenue paid out over two years, with adjustments made for lost clients in that period. Example: say they do $240,000 annually, and you are going to pay 1 1/2 times revenue so you will pay $360,000 over two years, or $15,000 per month. Let's say at the end of the first year, clients went elsewhere (common practice) meaning you lost $40,000 going into the 2nd year. Your payments would then be lowered to $12,500 to account for the loss.
There are different variances of this formula. I caution you to have a contract that also covers a non-compete on the part of the sellers. If it's in a foreign country that non-compete may not be valid. I had a client with a very successful market research company who wanted to expand in China. They came to an agreement unfortunately for cash at the end of 3 months. 3 months and 1 day later the seller opened RIGHT ACROSS THE STREET and continued his practice taking all the clients plus an influx of cash!
Be careful and good luck. Let me know if I can help.
What type of business is this, service, manufacturing, etc.
Have a business Plan, understand your cash flow and leverage as much as possible....