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Financing Your Transaction

There are many ways to finance an acquisition depending on the type of business, the nature of the assets and the history of financial performance. Needless to say, financing a start-up business with no performance history is quite different than financing the acquisition of an existing, financially performing business. We advise clients to develop a solid business plan prior to acquiring a company or seeking financing.

Financing an Existing Business with Financial History:

If the business you are acquiring has a solid track record, commercial lenders and Small Business Administration (SBA) loans are a good starting point. SBA Loans are actually loans from a commercial bank which are guaranteed by the SBA. Sometimes, the SBA funds a second lien loan as well. SBA 504 loans are typically secured by real property such as the building the business occupies. SBA 7a loans are working capital loans secured by the assets and inventory of the business. As an owner, you should anticipate signing a personal guaranty in favor of the bank and the SBA and possibly offering additional collateral such as your home or other property you own. Typically, the bank and SBA will want to see three (3) years of operating financials before agreeing to lend. The benefit to an SBA loan over a traditional commercial loan is the SBA will lend as much as 90% or the business value, known as 90% loan to value, while a traditional bank will more likely loan only 70-80% loan to value. SBA loans may have some additional up front costs and may have prepayment penalties, but do offer an excellent way to fund a transaction.

Other options include friends and family, suppliers, investors, venture capital, private equity and private placements, and private loans. Suppliers may offer terms on initial orders, including time to pay for the initial shipment of goods. With investors and equity placements, you give up some of the equity interest in the company which means you give up some control. It is advisable to have a shareholders' agreement or operating agreement with your co-investors making it clear how the company will be governed from leadership and operations to distributions, salaries, right to be paid back on the investment, etc. Investors expect a higher rate of return on their investment than a traditional bank loan because there is a greater risk of loss. Knowing the expected return and timing for that return is imperative and should be in writing.

If you are buying a franchise, often the franchisor will have pre-approved loan programs through selected lenders familiar with the and prepared to lend to new franchisees. These programs may or may not be the best loan deal available for you, however, they will generally be designed for quick approval and will have valuable know-how and experience in the business.

Financing Start-Ups:

Start-Ups are difficult to finance through commercial lenders and the SBA unless there is real estate because there is no financial history and assets. With that said, if you have good credit, you may be able to qualify for start-up loans through local grants and programs in your community. Contact the SBA and SBDC for information on these. Suppliers, friends and family, and personal savings are also the most likely sources of funds for new businesses. We advise owners to plan to have enough money to live on for a year in addition to the funds needed to start the business.

Your AEGIS Law, lawyer and accountant will have contacts and resources to help you though the financing maze.

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