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How to Finance Business Acquisitions Over $5 Million: Top Strategies for Success
Acquiring a business valued at over $5 million requires strategic financial planning and understanding of various funding sources. For entrepreneurs and investors looking to finance larger business acquisitions, especially those in non-metropolitan areas, it can be challenging to determine the best approach. Below, we’ll break down the most effective financing strategies to help you secure the funds needed for your acquisition.
The SBA 7(a) Loan and USDA B&I Program: Key Players in Large Acquisitions
For acquisitions over $5 million, the SBA 7(a) loan program and the USDA Business & Industry (B&I) loan program are two of the most common funding sources. Each has unique requirements and limitations, making it essential to choose the one that best aligns with your business and location.
- SBA 7(a) Loan: The SBA 7(a) loan is a popular option, particularly for acquisitions valued between $5 million and $10 million. However, the 7(a) loan is capped at $5 million, which means it often needs to be paired with additional financing to meet higher purchase prices.
- USDA Business & Industry (B&I) Loan: For those acquiring a business in a rural area with a population of fewer than 50,000 people, the USDA B&I loan may be an option. This program can support larger loan amounts in rural settings, making it highly relevant for acquisitions that exceed the SBA cap, provided the location meets the population criteria.
Building the Capital Stack: SBA 7(a) Loans, Conventional Loans, and Equity Injection
When financing a business acquisition greater than $5 million, structuring your capital stack becomes crucial. This capital stack is essentially a mix of funding sources that, together, provide the full purchase amount. A common combination includes:
- SBA 7(a) Loan: With a $5 million cap, the SBA 7(a) loan often serves as the foundation of the financing structure for larger acquisitions.
- Conventional Loan: In addition to the SBA loan, a conventional loan component is typically added. These loans usually range up to $2.5 million, depending on the bank and the business’s financial health.
- Seller Carry: Many acquisition deals include a “seller carry,” where the seller finances a portion of the sale price. In larger acquisitions, this amount is often around $1 million. Seller financing demonstrates the seller’s confidence in the business’s future performance and can make it easier to secure additional loans from other lenders.
- Equity Injection: Finally, an equity injection, typically around $1 million, is required. This injection is the buyer's own capital investment and serves to reinforce the buyer's commitment to the acquisition.
Alternative Financing Programs: Location and Bank-Specific Options
Financing structures can vary significantly based on the business’s location and the specific policies of lending institutions. Some banks have more flexible lending policies and are open to loans with minimal collateral, often called “airball” loans, making them ideal partners for acquisitions with less tangible assets.
Certain banks specialize in deals with “pari-passu” lending (where multiple lenders share equal priority on a loan) and may support larger acquisitions, especially if you can demonstrate solid cash flow and business viability.
Book a Consultation for Tailored Financing Options
For entrepreneurs who are ready to move forward with financing a business acquisition, consulting with a financial advisor experienced in acquisition loans can streamline the process. By visiting bookwithbow.com, potential buyers can schedule a consultation to discuss project details, financing options, and receive quotes tailored to their specific acquisition.
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Final Thoughts on Financing Large Business Acquisitions
Securing the right financing for a business acquisition valued over $5 million involves understanding different loan types, creating a balanced capital stack, and leveraging location-based programs. By combining SBA loans, conventional loans, seller carry options, and an equity injection, buyers can often find a workable solution for acquisitions that exceed standard lending limits. For the best outcome, consulting with a finance professional experienced in acquisition lending is highly recommended.
Whether you’re aiming to acquire a large business or considering franchise ownership, taking the time to understand your financing options will position you for long-term success.