Raising Capital 101: Funding to Buy a Business
24 June 2024
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Raising Capital 101: How to Raise Funding to Buy a Business
Navigating the complexities of M&A and securing funding to buy a business can be a time-consuming and stressful task.
Acquiring a business isn't just about finding the right opportunity, it's also about understanding and finding the right way to finance it.
With increasing competition and strict criteria set by financial institutions, understanding how to effectively raise capital, whether through a loan to buy a business, an acquisition finance strategy or any other mechanism, is essential. This knowledge will not only unlock your entrepreneurial dreams, but also lay the foundations for financial stability and growth.
In this blog, we will take you through the step-by-step process of assessing your funding needs, exploring different funding options - including business acquisition loans and small business acquisition strategies - and preparing your financial documents to secure the funding you need.
Each section is designed to give you the tools and knowledge to navigate the funding landscape with confidence. From the initial assessment of your financial needs to the final handshake that seals the deal.
Assess Your Funding Needs
To accurately assess your funding needs when planning to buy a business, it is worth considering the following steps:
Determine the cost of the acquisition: Start by determining the total cost of acquiring the business. This includes the purchase price and any associated fees such as legal, adviser and transfer fees. Understanding these costs in advance will help you develop a realistic budget and funding plan.
Understand your financial limits: Analyse your current financial resources to determine how much you can afford to invest without external funding. This assessment should include a review of your savings, potential investments from partners and other accessible funds that won't jeopardise your financial stability.
Consider future costs: Anticipate future operating costs after the acquisition. This foresight is essential for business continuity and growth. Make sure you account for expenses such as staff salaries, stock replenishment, technology upgrades and marketing activities.
By following these steps, you can formulate a comprehensive financial plan to support a successful business acquisition.
Explore Funding Options
Once you have a full financial plan in place, the next step is to look at your funding options, and there are a number of options to choose from:
Traditional Bank Loans
Approach banks with a solid business plan to secure a conventional loan. This option provides a lump sum with a fixed interest rate, making it an easy choice if you are buying a business with a strong financial history.
Personal Loans and Equity Finance
Explore private loans from individuals or companies, which offer more flexible terms than banks. Alternatively, you could consider equity finance by selling shares in the business to investors, which does not require immediate repayment and can ease cash flow.
Government Grants and Subsidies
In certain industries or situations, government grants and subsidies may be available. These can significantly reduce the financial burden. Grants are highly sought after, so be sure to do your research and prepare a strong business case to increase your chances of securing these funds.
Prepare Your Financial Documents
To effectively prepare your financial records for a business acquisition, start by gathering all the necessary documents. This includes past financial statements, tax returns and any relevant legal documents that reflect the financial health of the business. Next, prepare detailed financial projections. These should outline expected income, expenditure and cash flow for the next few years and provide a clear financial roadmap for the business after the acquisition.
Finally, develop a robust business plan that aligns with your financial projections and overall acquisition strategy. This plan should detail the operational, marketing and management strategies that will support the growth and sustainability of the business.
Secure the Funding
Now that you've got the foundations in place and a clear understanding of the type and amount of funding you need, it's time to go out and secure it. Here's what you'll want to do next:
Approach Potential Funders
Start by browsing our marketplace of over 800 lenders and investors. There is no hard credit check and any funding issued through the platform is yours. Our referral fee comes from our partner. Once you've decided who you want to approach for funding, you'll need to identify and contact potential funders, such as banks, private equity firms or asset-based lenders. Present a robust business plan and demonstrate the viability and potential profitability of the acquisition. Being prepared and proactive at this point sets the stage for securing favourable terms.
Negotiating Terms and Conditions
Once potential funders show interest, negotiate the terms and conditions of the funding. This includes the interest rates, repayment schedules, and any covenants or stipulations that may govern the use of the funds. Ensure these terms align with your business goals and financial capacity.
Finalise the Funding Agreement
Conclude the funding process by finalising the agreement with your chosen financier. Review the contract thoroughly, preferably with legal assistance, to ensure all terms are understood and beneficial before signing.
Foundy can assist you in the fundraising process
Explore Foundy today to take advantage of our comprehensive resources and expert guidance in the M&A landscape. If you are fundraising, check out our advanced platform for capital raising. We have over 1000 lenders embedded into the tool.
Foundy additionally offers specialised M&A advisory services across a wide variety of industries. If you're in the process of growing your business towards a funding round or an acquisition, clients have repeatedly recommended utilising a portal. It starts with a free business valuation. This will help you and our M&A advisors understand your company's current position and the necessary steps to position yourself for a successful sale. Foundy factors in over 29 key elements that contribute to your business valuation, ensuring a comprehensive and accurate assessment.
Similarly, if you're a buyer, Foundy's M&A advisors can help you find your next acquisition and streamline your end to end process via an all in one portal.
Ready to discover your business's value?
Running a business and deciding to sell or acquire another can feel like having two full-time jobs. While some business owners thrive on the excitement of buying and selling on their own, many, including myself, benefit from collaborating with experts who bring more sector specific experience. However, it’s important to note that working with M&A advisors is not a one-size-fits-all solution. Hence why we built our advanced portal and Find An Advisor programme to empower you with the tools, education and relevant expert support to help you navigate the end-to-end process and secure a higher valuation.
Check out the free calculator on our pricing page, which shows you the six to seven figures in additional share value Foundy can provide your business.
No matter where you are on your business journey, connect with Foundy to access the resources needed for a smoother acquisition or sale process.
FAQs
1. What are the various methods to finance a business purchase?
There are several ways to secure funding for a business, including personal investment, seeking contributions from family and friends, obtaining business loans, applying for start-up loans, using peer-to-peer lending platforms, securing business grants, exploring equity investment opportunities and engaging in crowdfunding.
2. What options are available to finance the purchase of an existing business?
To fund the purchase of a business, buyers may decide to use a combination of personal savings, equity from investors and possibly a commercial mortgage. They may also consider securing debt finance from a lender or even directly from the seller. It is important to agree all terms with the seller and ensure that all agreements are documented and signed.
3. How do entrepreneurs typically obtain funding for their ventures?
Entrepreneurs can secure funding from a variety of sources, including business loans, personal savings, contributions from friends and family, venture capital and start-up grants. These sources can provide the capital needed to buy and grow an acquisition.
4. How should a business proposal for funding be structured?
Business proposals should clearly describe the intended use of the funds. They should justify the need for the funding in a way that is easy for the lender or investor to understand and demonstrate how the funds will improve the profitability of the business. The proposal should also include a summary of financial projections from a business plan.
Disclaimer
Please note that this information is not financial or legal advice. Always seek professional advice before making any financial decisions relating to business acquisitions.