Funding a Business Acquisition

Buying an existing business can be faster than starting from scratch. You inherit customers, staff, systems and a track record. You also inherit the risks that the seller did not mention, and you take on payments from day one.

The difference between a good acquisition and a regrettable one is mostly preparation. This page walks through the basics: how deals are structured, what due diligence should cover, how financing pieces fit together and why you need working capital after closing, not just money to cover the purchase price.

This is general information. Acquisitions involve legal and tax complexity, so engage an attorney and CPA early.

Understand what you are buying

The deal can be an asset purchase, where you buy specific assets and assume chosen liabilities, or a stock or equity purchase, where you take over the entire entity including its history. Asset deals are common in small acquisitions because they can limit inherited liabilities, but they can involve re-papering leases, licenses and contracts.

Know exactly what is included: equipment, inventory, customer lists, leases, brand, domain names, software and the seller's cooperation. Define what is excluded and how inventory and receivables will be treated at closing.

Think about why the owner is selling. Retirement, burnout, a health issue or a new opportunity are common and benign reasons. Declining sales, a looming lease problem or a lost key customer are not. Ask directly, then check the answer against the numbers, and keep asking until the story and the documents agree.

Due diligence: verify everything

Review several years of tax returns, financial statements and bank statements, and compare them with each other. Check customer concentration, recurring versus one-time revenue, vendor terms, employee agreements, pending claims, permits and the lease. Ask for proof, not explanations.

Look at what the owner does personally. If the business depends on the seller's relationships and skills, a transition period and a non-compete may matter a lot to its value after they leave.

Visit the business at different times, speak with key employees if the seller allows it and, where appropriate, talk to a few customers and suppliers. Numbers tell you what happened. People tell you why, and whether it will continue under new ownership.

• Tax returns, P&Ls and bank statements for several years
• Customer and vendor concentration and contracts
• Lease terms, licenses and permits
• Employee roles, pay and key-person risk
• Debts, liens, lawsuits and unpaid taxes

Valuation and price

Small businesses are often priced as a multiple of seller's discretionary earnings or EBITDA, with the multiple reflecting size, stability, growth and risk. Adjust earnings for owner perks and one-time items and test whether the price leaves you enough cash after debt service to earn a reasonable living.

A quick check: if the business earns $180,000 per year available for debt service and owner pay, and the price requires $140,000 per year in payments, little is left for you. The example is hypothetical, but this kind of stress test often reveals deals that look better on paper than they are.

Consider hiring a business broker, an M&A advisor or a CPA experienced in small deals. Their fees can be modest compared with the cost of overpaying or missing a hidden liability.

Structuring the financing

Most acquisitions combine sources: your down payment, a seller note where the seller is paid over time, senior financing such as a term loan or SBA-backed financing, and sometimes an earn-out tied to performance. Each piece has its own terms and risks.

Seller financing can signal confidence and reduce cash needed upfront. Make sure the note, security and default terms are clearly documented and that the seller remains incentivized to help with the transition.

Do not forget working capital

New owners are often surprised by how much cash the first months require. Receivables and inventory may be handled differently at closing, vendors may tighten terms with a new owner and unexpected repairs or deferred maintenance can appear.

Set aside working capital in addition to the purchase price. Funding partners may help with working capital after closing, and including it in your plan avoids a cash crunch on day sixty.

Plan the first ninety days. Decide who you will meet, which systems you will keep, what you will change and what you will leave alone. Many acquisitions go wrong by changing too much too fast.

How Fidelity Funding can help

Fidelity Funding is a broker that connects you with funding partners, not a direct lender. A short application and soft credit pull start the review, and a funding specialist goes through options with you, including working capital for the transition. Decisions can often come within hours, but approval, amount and terms vary by funding partner and underwriting and are never guaranteed.

Bring your letter of intent, the target's financials and your own projections. When you are ready, start your application and ask the specialist how each piece of the deal could be funded.

This article is for general information only and isn’t financial, legal or tax advice. Funding approval, amounts and terms are set by funding partners and depend on underwriting.