Buying a business is one of the most rewarding moves you can make, but it requires serious financial planning. Many buyers focus on the price tag or revenue potential, but they often overlook the structure of the deal and how much capital is really needed.
Whether you’re acquiring your first business or adding to an existing portfolio, understanding your financing options and capital requirements is essential to secure a successful deal and keep the business running smoothly afterward.
In this article, we’ll break down the most common ways to finance a business acquisition, along with the key financial considerations every buyer should plan for:
Common Financing Methods for Buying A Business
When acquiring a business, the buyer rarely pays the full amount out of pocket. Most deals combine funding from multiple sources, so it’s important to understand how these methods work together:
Personal Equity (Your Down Payment)
If you’re buying a business as an individual or small group, you’ll almost always need to contribute your own capital, usually 10% – 25% of the purchase price. This equity contribution shows lenders that you’re committed and helps reduce their risk.
Large corporations or private equity buyers may pull this equity from reserves or investment capital rather than personal funds, but in nearly all cases, some level of buyer equity is expected to get things moving.
Bank Loans and SBA Financing
Traditional bank loans are available for qualified buyers, but they often require strong credit, collateral, and a solid business plan. It’s much more common for buyers to use an SBA 7(a) loan, which is backed by the U.S. Small Business Administration.
The SBA doesn’t lend money directly; it only guarantees a portion of the loan to the bank, making it more likely for the buyer to secure financing. Depending on the size of the deal and what type of SBA loan the buyer is applying for, they can sometimes cover up to 90% of the deal, including working capital to cover future expenses.
Seller Financing
Seller financing is an option where the seller agrees to receive part of the purchase price over time, typically with interest. Instead of the buyer paying the full price at closing, they pay a part upfront and the rest in installments.
For example, a buyer is only able to secure 80% of the purchase price through various financing methods, but the seller agrees to sell now and receive the remaining 20% over time.
Seller financing is common in small to mid-sized deals. It can help make up for small gaps in financing, reduce the need for additional bank loans, and shows that the seller has confidence in the business’s continued success after handing it over to new ownership.
Equity Partners or Investors
In some cases, buyers decide to bring in outside capital from investors or partners. These individuals or firms generally contribute funds needed in exchange for an ownership stake, acting as either active or silent partners.
Getting financing through investors or private equity firms can greatly increase your buying power, but it also means sharing profits and decision-making. If you’re considering looking toward investors or equity partners for financing, laying out a detailed operating agreement is essential to avoid conflicts down the road.
Alternative Financing Options
Depending on the situation, there are a few other options for financing, including:
- Asset-based Lending: Loans backed by inventory, equipment, or receivables (outstanding invoices, credit extended to customers, etc.)
- ROBS (Rollovers as Business Startups): Buyers may be able to put retirement funds (401(k), IRA, etc.) towards buying a business using a special corporate structure.
- Revenue-Based Financing (RBF): Lets you repay a loan with a percentage of future sales. RBF is more commonly used as a short-term finance option for growth (buying new equipment, updating systems, etc.), but it can also be used to quickly acquire smaller companies or ones with recurring revenue streams.
Capital Considerations Beyond the Purchase Price
Many buyers focus only on how to pay for the business, but financial planning shouldn’t stop once the deal is closed. Here are a few essential capital needs to keep in mind after you’ve acquired the business:
Working Capital
After the business has transferred ownership, you’ll still need money on hand to run it. Working capital covers payroll, inventory, rent, marketing, and other operating costs, which is especially important during the transition period.
Some loans (including SBA options) let you include working capital as part of your financing package. If they don’t, you’ll need to set aside the funds yourself.
Cash Flow vs. Debt Payments
It’s crucial that the business provides enough cash flow to cover your monthly debt service (the amount you’ll owe on loans and seller notes). Be realistic about the business’s performance and don’t rely on best-case scenarios. Always plan based on conservative cash flow projections. Build a cash flow forecast and aim for a Debt Service Coverage Ratio (DSCR) of 1.25 or higher, which means that the business generates 25% more income than it needs to cover loan payments.
Closing and Deal Costs
Buying a business usually involves several professional fees and other expenses related to the M&A process that are separate from the purchase price itself. This may include:
- Legal and accounting fees
- Valuation reports (QoE reports, certified business valuations, asset appraisals, etc.)
- Lender closing costs or SBA fees
Depending on the deal’s size and complexity, you may need to set aside $5000 – $25000 for due diligence, attorney fees, and closing costs. This should be factored into your total capital plan so that you’re not caught off-guard.
Contingency Funds
Unexpected expenses happen, and they can be especially disruptive when picking up a new business. Having a contingency fund (ideally 3 – 6 months of operating costs) can help you weather surprises including:
- Unexpected equipment repairs or replacements
- License, certification, and insurance policies (reapply/update/renew)
- Staff turnover
Post-Acquisition Investments
After the purchase, you may want to upgrade equipment, launch a marketing campaign, hire new staff, or modernize your systems. These growth investments can help to start the new venture off on the right foot, but they can be costly. Plan ahead and save wisely so that you’re able to accomplish your goals as a new owner.
The most successful buyers understand that their financial responsibility doesn’t end at closing – it begins there. That’s why having the right deal team makes all the difference. At The FBB Group, we help buyers navigate the M&A process with confidence, connecting you with trusted professionals, managing negotiations, and keeping the deal on track, from preparations to final closing.
If you’re looking to buy a Colorado business, call The FBB Group at (800) 395-7653 or contact us online to get started.