Buying a second business can help you acquire a greater share of your target market. It can also boost your credentials, revenue, and profits. Sounds great, right? However, like anything in life worth pursuing, acquiring a second business comes with risks and setbacks. Therefore, buying another business is a decision you will need to make carefully.
One of the greatest hurdles to the acquisition of a second business is lack of funding. No matter how successful they are, few small business owners have the upfront capital to buy a new business outright. Financing a business acquisition can be tough, but thankfully there are various commercial loan options available.
First, why should you start another business?
Reasons to acquire a second business
Believe it or not, one of the quickest and most cost-effective ways to grow an existing business is through the acquisition of another.
Many small business owners start more than one business for the following reasons:
- Owning more than one business increases sales and profits
- Owners of multiple companies can consolidate overheads and reduce costs
- Through company acquisitions, you can capitalize on your existing name and reputation
- Multiple businesses provide financial security with more than one income stream
- Starting more than one business keeps your ideas fresh and brings variety to your work life
- You will get better interest rates on business loans the more experienced you are
- You can utilize your experience in your field by starting a second business in the same industry
How to buy a second business
Want to become a serial entrepreneur? Here are some tips to help you acquire a second business.
1. Find the right business to buy
One of the best ways to increase profits and sales through acquisition is to buy a company in the same industry as your existing business. The benefit of sticking within your niche is that you’re already knowledgeable about what you do, so you will make fewer mistakes the second time around. Buying a company in a similar industry allows you to penetrate your existing markets further and improve operational efficiencies.
2. Research funding for your business acquisition
Acquisition loans are a great way to finance a second business. However, you need to know where to look to make sure you’re getting a good deal. Beware that business acquisition loans are complex. If you’re thinking about taking out an acquisition loan or industrial equipment financing, talk with your bank early on in the process – before you start negotiating with the seller.
If you’re applying for an SBA loan, make sure you’re dealing with a lender who has SBA experience. Always shop around for the best interest rates for business loans, as these tend to vary.
3. Approach the current owners
You will need to approach the current owners of the business to let them know you want to buy it. This needs to be done formally, through a written letter of intent.
A letter of intent is one of the requirements for being granted an acquisition loan. You won’t get business loans for this purpose without one.
4. Prepare to take over the business
Buying a second business is only half the battle. Once you have secured the cash advance and put your intentions in writing, you will need to prepare to take over the business and make sure it turns a profit.
You will need to make decisions based on how you will turn the business versus its current ownership. Will you change the products or services, for example? Do you plan to finance a refit or change premises? Will you keep the same staff or hire new ones?
How to apply for a small business loan
If you have taken out commercial loans before (for your first business), then you will know what the process entails. You will be familiar with the terms and the interest rate for business loan borrowers. However, if you’re approaching a lender for the first time, there are some things you need to know.
Where to find an acquisition loan
A common way to finance the acquisition of a new business is with an acquisition loan from the SBA. These loans are usually offered by banks in partnership with the SBA. They are designed to help entrepreneurs and small business owners who need money to buy a business.
How to get approved for an acquisition loan
Although acquisition loans are easier to get than conventional business loans and equipment loans, they still follow a strict underwriting process. This means you need to be prepared with the following if you want to meet the lender’s requirements:
- A signed letter of intent
- A solid credit score, usually a minimum of 650
- Form 413/Personal Finance Statement for yourself and your business partners
- Form 1919/Borrower Information Form used to collect information from you and your partners as to why you want to purchase the company
- Personal and corporate tax returns dating back 3 years
- A list of your debts and liabilities – otherwise known as a “debt schedule”
- Business management experience
- Repayment plan, including interest rates for business loans
- A down payment for the loan – usually around 20%
As their name suggests, acquisition loans are meant solely for the acquisition of business. You can source different loans from the SBA for other purposes. These include interest only business loan options and equipment financing.
Today, many business owners focus all their resources into expansion, without realizing that there is a faster, more cost-effective path to growth: acquiring a second business in a similar industry or niche. They may take out expensive equipment loans to enhance their business offering, without considering that their money could be better spent on a new venture.
In the words of entrepreneur and online marketing expert Neil Patel:
Owning multiple businesses is becoming a reality for many entrepreneurs. It’s hard not to see the benefits, such as more profit, better financial security and a chance to further your good name in your industry. If you can secure the right commercial loan, then your legacy doesn’t have to be owning just one business. Remember, this is just the start of your promising and successful future as an entrepreneur.