How to Pay for a Business Acquisition

Paying for a Business Acquisition

So you want to buy a business and you’re not sure how to pay for it. There are a number of ways to pay for a new business, but the most common are cash at closing, seller financing in the form of deferred cash payments or promissory notes, securities issued by the purchaser, and contingent payments. Contingent payments aren’t so much a form of payment as much as a means of determining the final price of the business assets, but I’ll throw it into the mix because if you’re wondering how to pay for a business, you might want to consider negotiating contingent payments.

Cash at closing

Cash at closing is the simplest form of payment. Sometimes the buyer has cash available without the need for financing, but the cash is often obtained via a bank loan taken out for purposes of funding the acquisition and possibly mezzanine financing provided as a junior loan to the bank loan. The bank generally secures its loan with a blanket lien on all of the assets of the acquired business, and the loan agreement often contains covenants that restrict the buyer’s business operations in some ways.

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SBA 7(a) Loans for Buying a Business

SBA 7(a) Loan

The problem with paying for a business acquisition is coming up with the money. The buyer’s savings is a key component of acquisition financing. And in today’s business environment, sellers generally finance at least part of the deal when they’re selling a main street business. But that often leaves a significant portion of the purchase price to be funded by other sources.

A lot of buyers turn to SBA-backed loans to bridge the gap. Is an SBA loan right for you? Here are some pros and cons to help you decide whether you should explore an SBA 7(a) loan, the type of SBA loan that’s most common for acquisition financing.
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