Entrepreneurship by Acquisition: A Direct Path to Ownership
Embarking on the journey of acquisition entrepreneurship can be a thrilling yet daunting prospect. For aspiring business owners utilizing the entrepreneurship by acquisition model, the path doesn’t always begin with a new startup – it starts with a strategic purchase of an existing, profitable small business.
This form of entrepreneurship presents a unique set of opportunities and challenges, with the financing aspect often being a significant hurdle for many potential buyers.
This guide explores the various financing options available to aspiring acquisition entrepreneurs and how to navigate the complex process of purchasing a small business.
The Potential of Acquisition Entrepreneurship
Acquisition entrepreneurship, also known as entrepreneurship by acquisition, is the strategy of purchasing and operating an existing business as the pathway to becoming an entrepreneur.
Unlike traditional startups that begin from scratch, business acquisitions allow entrepreneurs to immediately access a proven solution, an established customer base, and income-generating operations. The allure is clear – instead of spending years building a business, acquisition entrepreneurs can hit the ground running, provided they can secure the necessary financing.
Why Buy an Exisiting Business for Sale
Buying a small business for sale has several inherent advantages:
- Less Risk: Established businesses often come with a track record that allows for a more accurate assessment of potential return on investment, reducing some of the inherent risks of starting from scratch.
- Operational Know-How: Access to existing operations, supply chains, and processes enables new owners to leverage previous success.
- Immediate Revenue: Unlike startups, an acquired business typically starts generating revenue from day one, accelerating the path to profitability.
- Brand and Reputation: Acquired businesses often bring with them existing brand equity and customer loyalty, invaluable assets to market penetration and growth.
The Small Business Acquisition Process
The acquisition process involves several key steps:
- Market Identification: Deciding on the right business entails identifying a niche market, a desired location, and industries with growth potential.
- The Search: Actively searching through various channels like brokers, online marketplaces, and networking can reveal potential businesses to consider.
- Negotiating the Deal: Once a business of interest is identified, negotiations begin, with a focus on the terms of purchase and, crucially, financing.
- Due Diligence: An exhaustive due diligence process follows, intended to validate the business’s financials, operations, legal compliance, and potential risks.
- Financing Acquisition: The final, and often most critical, step is securing the funds to complete the purchase.
Navigating the Financial Landscape of Small Business Acquisitions
For potential business owners, understanding the financial instruments available is key to unlocking the door to their future enterprise. The following sections explore the various financing models tailored to facilitate small business acquisitions.
Financing Support for Acquisition Entrepreneurship
Learn how BankLink helps entrepreneurs view their financing options.
Self-Financing Options for Acquisition Entrepreneurs
Personal Savings
Self-financing uses personal savings or liquidated assets to fund the purchase of a business for sale. While it reduces the need for third-party financing, it is not always feasible given the high costs of business acquisition.
Home Equity Loans
Entrepreneurs who own property have the option of tapping into their home’s equity with a loan. Home equity financing is often attractive due to lower interest rates and the possibility of tax deductions.
Retirement Funds
Some individuals leverage funds from their retirement accounts through options like rollovers for business startups (ROBS). Although it can be a viable source, it requires careful consideration due to the potential tax implications and impact on retirement plans.
Bank Loans
Conventional bank loans offer a tried-and-true commercial financing options, typically with stringent approval criteria.
Small Business Administration (SBA) Loans
SBA loans are a popular choice due to the government guarantee that mitigates risk for lenders, allowing for more favorable terms and competitive interest rates to finance up to $5million for a business acquisition. Eligibility criteria for SBA loans vary from lender to lender (we explain why this is in our recent blog on SBA loan credit requirements) which can sometimes complicate the financing process if a buyer is not leveraging Windsor BankLink’s SBA lender matching platform.
Seller Financing
Seller financing occurs when the business owner is willing to facilitate the deal by acting as the lender. This model incentives the seller to collaborate with the new owner for a smooth transition, aligning the seller’s interest with the success of the business under new ownership.
Alternative Financing Options for Buying a Small Business
Crowdfunding
While more commonly associated with startups, crowdfunding can also be used to finance a business acquisition. It involves raising small amounts of money from a large pool of investors, often leveraging online platforms.
Angel Investors
High-net-worth individuals or networks provide funding in exchange for equity or convertible debt. Angel investors can bring significant capital and industry experience to the table, but may be difficult to find.
Venture Capital
Venture capital is less common in small business acquisitions but an option for businesses with high-growth potential. Venture capitalists typically seek strategic investments with the potential for substantial returns. This often comes at the expense of diluting the buyer’s equity in their new company.
Acquire a business, Retain Your Equity
Finance a small business acquisition without giving up equity. That’s the appeal for many entrepreneurs considering SBA loans to buy a small business for sale.
Read our deep dive on how to leverage an SBA loan efficiently for your next acquisition.
The Importance of Due Diligence and Valuation
The due diligence process is the deep dive into the business’s operations and financials, ensuring that prospective buyers understand what they are acquiring. This includes a thorough review of contracts, financial statements, employee records, customer data, and more.
Valuation is the process of determining the worth of the business. Both art and science, it involves analyzing the company’s financial health, its position within the industry, and its future prospects. A fair valuation is crucial for a successful acquisition, ensuring that the purchase price reflects the true value of the business.
Crafting Your Entrepreneurship Acquisition Strategy
Developing a comprehensive acquisition strategy is essential for securing the right financing and making an informed purchase. This involves understanding your market, identifying acquisition targets, and building a robust financial plan.
Assessing Growth Potential and Market Trends
Staying abreast of market trends and assessing the growth potential of the business under new ownership is integral to the success of your acquisition. It informs your financing decisions and ensures you are investing in a business with a promising future.
The Role of Professional Advisors
Engaging professional advisors such as lawyers, accountants, and business brokers can provide critical expertise. They can guide you through the complex negotiations, help structure a favorable deal, and ensure you are well-prepared for the due diligence process.
Building a Strong Acquisition Team
Your acquisition team should consist of individuals with complementary skills and experience. From financial advisors to industry experts, each member should contribute to a well-rounded assessment of the acquisition opportunity.
Access Your Financing Options for Acquisition Entrepreneurship
Acquisition entrepreneurship’s unique value as an emerging business model is starting to gain visibility at commercial lenders across the country. Some lenders may view it more favorably than others, and may adjust their credit standards to facilitate more commercial lending to promising strategic buyers.
Our mission at Windsor Banklink is to facilitate small business success by reducing the burden placed on business owners seeking financing.
Historically, aspiring business owners must submit multiple, complex, document-heavy applications to understand their business lender options. Often, racking up a number of “no’s” before finally getting a “yes”. BankLink requires you to submit your information only once.
Once your documents are in our portal, they can be processed for any lender in our network. Our experts match you directly to the lender where you’re most likely to qualify for business acquisition financing based on proprietary knowledge of the lender’s credit policies, industry expertise, and region.
This process streamlines the aspiring acquisition entrepreneur’s search for a lender, allowing the entrepreneur’s focus to remain on the search for a small business to buy. Learn more about the working with the BankLink team on your next small business acquisition by completing the form below.
