Financial Considerations When Buying a Small Business

Buying a small business is a popular route on the road to business ownership. Every year, close to 500,000 businesses are sold. And this number is expected to rise as baby boomers continue to retire and hand over leadership.

There are a number of financial considerations that can impact your decision to buy a small business. From what financial documents to ask for to what financing options are available, we are sharing everything a potential small business buyer needs to know.

Lower upfront costs

One financial perk of buying a business over going the startup route of entrepreneurship is lower upfront costs. With an existing business, someone else already put in the time and money creating a business plan, conducting market research, purchasing building space, product inventory, and hiring employees.

Having all these things in place doesn’t necessarily mean that everything is perfect or that the business is turning a large profit — which is still important to pay attention to. But what you are gaining is a business with structure and access to people who understand the market. You can spend your time determining what aspects of the business you need to focus on first.

Lower operating costs

Depending on the type of business you’re purchasing, there is a good chance the operating costs are going to be lower than if you were starting a business. If you compare buying a restaurant versus starting a restaurant, you will spend nearly $500,000 in startup costs to get a new restaurant off the ground. Having lower operating costs means that you can invest your time and money in business growth and developing your vision for the business.

Business financials

Before signing on the dotted line be sure to critically analyze all of the business financials. Some of the things you will want to make sure you look at are:

• Tax returns
• Balance sheets
• Cash flow statements
• Debt disclosures
• Accounts receivable and payable

Looking at these documents with the help of a commercial banker or accountant will help you understand the overall financial performance of the business and if there is a path toward continued or increased profitability. Having this information will also help you and potential investors feel confident in the acquisition.

Available financing

Once you and the seller come to a purchase agreement, you will need to start exploring financing options. There are a couple different types of loans that will help in buying a business.

1.Term loan

A term loan from a bank has a set amount and repayment schedule. The rates and terms will vary depending on the lender and your financials. Term loans are a good option for established businesses that are profitable and able to make a large down payment on the loan.

2. SBA loan

An SBA loan is one of the most affordable financing options for small business owners. The SBA works with banks and other lenders to guarantee up to 75% of loans they issue. If you are buying an existing business, the 7(a) loan program through the SBA is a great option. It offers longer repayment terms, higher borrowing limits and competitive interest rates.

Related content — 3 key advantages of an SBA loan
 

3. Asset-based financing

This type of financing allows you to borrow capital against an asset. The asset you borrow against acts as collateral in case you default on the payments. The three different types of assets you can use as collateral are equipment, inventory and unpaid invoices. Asset-based financing will likely not be enough to cover the entire purchase cost of the business but is still a great option to help access the capital you need.

When you apply for a loan to help buy a small business, be prepared to share your personal financial statements, tax returns, business plan and other important financial documents.

Related content — What you need to know before applying for a small business loan

If you are exploring opportunities to buy a business, reach out to one of our business bank representatives today to learn more about the support and resources Northwest Bank has to offer.