Buying and selling businesses is a complex area of law so this article aims to give a brief overview on the breakdown of financial funding factors to consider, making the purchase a little bit easier. Every business acquisition is different but there are key points to think about, particularly the funding aspect. There are several different ways in order to raise finance to buy a business:
- The most common route is to seek a loan or overdraft facility from the bank. Invariably this will be an option for most or part of the payment even if you have found funding from elsewhere. In the current economic climate, obtaining credit is difficult and therefore it is essential to produce a detailed and realistic business plan. The business plan will structure how you intend to repay the debt and should persuade the lender that you are a minimal risk. The business plan must forecast projected net cash flow after expenses and loan payments.
- Another option is to set up a contract with Venture CapitalistsÂ, who will provide finance for a high equity stake in the target business. The financial support will almost certainly come with conditions, relating to influencing major management decisions and the time that the debt will need to be repaid by. The Venture CapitalistsÂ will very likely want the new business to be packaged for sale in a short to medium period of time so that there is a prompt return of investment.
- Private investors may be a desirable option if you are finding difficulty with obtaining funding from more traditional methods. Private financiers, or Âangel investorsÂ, may also provide guidance with how to run the business, as well as supplying cash flow. Examples of this type of investment can be seen on popular television show, ÂDragonÂs DenÂ. It is important in this method to seek advice from a solicitor to produce a secure contract detailing the terms of the agreement.
An option for buying a business may be that the existing managers purchase the business that they are employed in from the current owners, known as management buy-out. (MBO) Although these transactions accompany a degree of risk, they have been a large increase in MBOs as there can be huge personal financial gain if the business is successful.
A management buy-in (MBI) is where an outside team of management buys into and takes over the business. MBOs and MBIs are almost always substantially funded by the management teams borrowing money through personal loans.Â
Any method of raising money will require a comprehensive, viable business plan to ensure the security of investment.