How to Overcome Common Business Acquisition Challenges

Two business owners meeting.
Purchasing an established business presents an exciting opportunity for aspiring entrepreneurs, but it’s crucial to recognize the challenges associated with the lending process. At SouthState, we are committed to assisting borrowers in navigating the complexities of business acquisition, enabling them to acquire businesses they’re passionate about. In this article, SBA Relationship Manager, Kameron Knowlton, gives us insight into the most common challenges borrowers encounter during the lending process, and shares her tips on how to mitigate these obstacles.

Insufficient Funding

One of the biggest challenges entrepreneurs face is finding enough cash to buy the business. Buying a business often requires significant capital, and entrepreneurs may not have the personal resources readily available to finance the purchase. Banks and other lenders may be hesitant to lend money to borrowers who are new to business ownership, or who don't have sufficient collateral to put up.

If you're struggling to secure financing, you may want to consider working with a business broker or SBA lender. SBA lenders have experience in helping entrepreneurs obtain the financing they need, and they can provide a variety of loan products to suit your needs. If you go this route, it’s important to create a detailed business plan and financial projections - this can help convince lenders of your business’ potential. At SouthState, we have various resource partners we could recommend, such as SCORE, the Small Business Development Center, and the Small Business Administration (SBA).

Other sources for gathering the funding you need include leveraging crowdfunding platforms or seeking out angel investors. Crowdfunding is where a group of individuals donate small amounts of money to your business venture, and angel investors are typically wealthy individuals who are looking to invest in early-stage businesses.

Limited Collateral

Even if you can find a lender willing to finance your purchase, they likely will require significant collateral for a business loan. A safety net for lenders, collateral is an asset the lender can seize if you default on the loan. If you don't have substantial assets in your name, you may need to consider alternative financing options, find a co-signer, or pledge personal assets as collateral.

You could attempt to negotiate a seller financing arrangement, where the seller of the business finances the business acquisition instead of the bank. The seller will likely have their own unique requirements and expectations, but these can sometimes be more lenient than traditional bank lending guidelines. Seller financing is attractive for both the buyer and the seller because both parties save money on closing costs, and this allows them to negotiate their own repayment schedule, interest rates, as well as other terms and conditions of the loan.

Due Diligence Challenges

Due diligence is the process of investigating the business you're considering buying. This includes reviewing financial statements, interviewing employees, assessing the market, and identifying any potential risks you’re acquiring with the business. Due diligence can be a time-consuming and challenging process, but it's essential to do your homework before you buy a business.

Experienced accountants, SBA lenders, and lawyers can help navigate legal, financial, and operational due diligence effectively. These seasoned professionals bring expertise to the table and assist you in ensuring that you achieve ideal, market-based terms before closing the deal.

Valuation Discrepancies

Valuation discrepancies arise when the buyer and seller have different opinions on how much the business is worth. The buyer doesn’t want to overpay for the business, and conversely, they don’t want to miss out on a valuable opportunity due to a low-ball valuation. This uncertainty can cause tension between the buyer and seller, protract negotiations, and even derail the deal entirely.

To avoid a valuation discrepancy, it's important to hire a professional to perform an independent appraisal of the business before you make an offer. The appraiser can provide a comprehensive assessment, considering factors like market trends, financial performance, and growth potential. The results of the appraisal can help the buyer make an informed decision and ensure the cost of buying the business aligns with its true worth. SouthState can recommend valuation companies that have the proper credentials and years of reliable valuation experience.

Low Credit Score

Business acquisition requires a considerable amount of capital, and before a lender agrees to loan you money, they will assess your credit history meticulously. This means they'll look at your credit score, debt-to-income ratio, and other factors. Financial blemishes like outstanding debt or other credit issues can hinder a borrower's ability to receive favorable financing terms. If you have poor credit, you may have trouble getting financing at all.

To strengthen your credit score, strive to pay bills on time, reduce outstanding debt, and proactively correct any errors in your credit report prior to initiating the acquisition process. Showcasing a solid credit profile can help prove to lenders you’re a reliable lending candidate and can increase your chances of receiving financing on favorable terms.

In addition to your credit score, lenders also consider your debt-to-income ratio when determining your eligibility for financing. This ratio compares your monthly debt payments to your monthly income. Ideally, lenders prefer a lower ratio, as it indicates that you have enough income to comfortably manage your debt obligations.

To improve your debt-to-income ratio, you can focus on reducing your outstanding debt. Start by creating a budget and identifying areas where you can cut back on expenses. This will free up more money to put towards paying off your debts. Consider prioritizing high-interest debts first, as tackling these can have a significant impact on your overall debt load.

By showcasing a solid credit profile, you increase your chances of being seen as a reliable lending candidate. Lenders will be more inclined to offer you financing on favorable terms, such as lower interest rates and longer repayment periods. Remember, building good credit takes time and effort, but the benefits are well worth it when it comes to securing favorable financing options.

Employee and Customer Retention

During a business acquisition, one of the most pressing concerns is the retention of valued employees and loyal customers. Employees may feel uncertain about their future within the organization, while customers may be wary of changes in the service they’ve come to rely on. It’s essential to prioritize open communication and transparency during this time. Assure your employees of job security, provide incentives, and demonstrate a commitment to maintaining customer relationships in an effort to retain key stakeholders. Some sellers willingly offer to stay for a negotiated period to assist the new buyer in successfully transitioning the business over, but occasionally the new buyer sees areas of concern and quickly exits the seller. Employee and customer retention can be apart of the negotiation process and included in the Purchase/Sale Agreement.

The nuances of business acquisition are too great to navigate alone. By leveraging a seasoned SBA lender, you’ll have expertise to guide you through your decision-making and strategic planning. Contact a SouthState SBA Banker today.

About the Author, Kameron Knowlton: Kameron Knowlton is a Vice President, Relationship Manager with SouthState’s SBA Lending Team. Kameron began her banking career 30 years ago in Jacksonville, Florida. She considers her career in SBA lending the most rewarding because she loves helping small business owners.

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