A Guide to Buying an Existing Business With Non Traditional Lending

September 5, 2023
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What is Non-Traditional Lending?

Non-traditional lending refers to alternative financing options like merchant cash advances, online small business loans, and factoring that provide funding outside of traditional bank loans.
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10 Step Guide to Acquiring an Existing Business With Non-Traditional Financing

Step 1: Research Industries and Target Markets

The first step is assessing industries with potential upside. When weighing options, consider:

IndustryFactors to ExamineExamples
Growth OutlookProjected expansion rates, new trends, regulationsTechnology, green energy, healthcare
Barriers to EntryCapital needs, licensing, IP protectionManufacturing equipment
Consolidation ActivityMergers & acquisitions activity signaling maturationRestaurants/franchises in a region

Study promising industries like tech, where mobility startups raised $100 billion in 2021. Healthcare also benefits from macro trends as the population ages. Look within high-activity regions undergoing mergers that left smaller players behind, like restaurants in major cities.

Scout undervalued markets too. For instance, towns with recent infrastructure booms or remote work migration could yield opportunity in housing, transportation, or professional services catering to newcomers.

Step 2: Evaluate Business Brokers and Listings

Contact Brokers in Target Markets

  • Search online directories for brokers specializing in desired industries/locations
  • Meet local brokers in person to share your criteria and budget
  • Brokers offer guided access to off-market opportunities through their networks

Screen Listed Businesses Carefully

  • Filter listings on sites like Zipprr by price, size, financing options
  • Pay attention to financials, common size statements
  • Note start date, experience of existing owners leaving
  • Check growth potential, competitive edge over new entrants

Consider Off-Market Sources too

  • Follow relevant Facebook groups, LinkedIn pages
  • Check local ads beyond national listings hubs
  • Mention your search criteria to professional advisors
  • Word-of-mouth from trusted advisors can yield hidden gems

Identify Red Flags Promptly

  • Beware of properties with issues like lease disputes, aging assets
  • Steer clear of illegal or unethical industries or markets
  • Watch for unrealistic projections or gaps between seller/broker stories
  • Get independent valuations to avoid overpriced listings

Taking the time upfront to establish strong broker connections and screen quality opportunities sets the stage for successful financing and acquisitions later.

Step 3: Identify Suitable Target Businesses

Once industries and listings are screened, focus on candidates demonstrating stable foundations and upside potential.

Look for businesses exhibiting factors like:

  • Established operating history, preferable 3-5 years with the same owner
  • Positive cash flows and comfortable profit margins as seen on income statements
  • Strong reviews and customer retention visible on websites or third party pages
  • Recurring revenue streams like subscription/contract models rather than one-offs
  • Scalable operations and infrastructure allowing expanded capacities
  • Lower barrier industries with fewer regulatory hurdles or capitals needs
  • Opportunity to implement upgraded systems and processes boosting performance
  • Room to add synergistic products/services leveraging existing clientele
  • Growth marks like recent new clients or expansions onto untapped adjacent markets
  • Passionate, flexible sellers willing to provide transition support after close

Step 4: Review Financial Statements

It’s crucial to understand the business’s financial health and performance.

Examine key documents like:

  • Income statements: Check consistent profits, profit margins (e.g. 30-40% common for services). Beware losses or fluctuating results.

  • Balance sheets: Ensure adequate cash flow & low debt. Healthy current ratios above 1:1 indicate ability to pay short-term obligations

  • Cash flow statements: Reveal sources/uses of cash. Positive operating cash flows and low capex needs are favorable.

  • supporting schedules: Verify sell-backs and non-cash expenses added back. Lines may include owner salary above market rate to boost profits.

  • Common size statements: Allows comparing financials to industry norms. Revenue/expense structure deviations warrant explanation.

  • Taxes: Ensure business structure and tax filings are compliant and profits reported match financials.

  • Ask for previous 3-5 years of statements: Helps assess financial trajectory and strength of financial controls over time.

Step 5: Interview Staff, Suppliers, and Customers

Getting objective perspectives is key. Discreetly conduct meetings to:

StakeholderPurposeInsights Sought
StaffUnderstand culture, processesEmployee satisfaction, retention issues, growth plans
SuppliersVerify financial standingPayment cycles, order volumes, reliance on key partners
CustomersValidate product/service qualityFeedback, contract lengths, price sensitivity, referral sources
  • Ask open questions to identify strengths/weaknesses

  • Note staff morale, supplier relationships quality

  • Seek examples of problems addressed, functional improvements

  • Discern customer loyalty factors like service, branding, stickiness.

  • Confirm financials match realities stakeholders report

  • Compare insights across groups for consistency

Corroborating seller materials externally builds confidence in acquisition assumptions while revealing any “red flags” like supply disruptions.

Step 6: Determine a Fair Purchase Price

Establishing a reasonable price is critical for acquisition success and financing approval. Several valuation approaches can be used:

Typically industry standard valuation multiples are applied to financial metrics like EBITDA (earnings before interest, taxes, depreciation and amortization) to determine a ballpark range. Common multiples are 2-5 times EBITDA depending on factors like:

  • Growth rates – Higher multiples for faster growing sectors
  • Asset intensity – Lower multiples for asset-heavy vs. service businesses
  • Risk profile – Established companies warrant higher multiples than startups
  • Market trends – Businesses in expanding industries may see premiums

Comparable transaction analysis leverages similar sized acquisition prices in the target industry and region.

Discounted cash flow valuation forecasts and discounts future cash flows to arrive at a present value.

Adjustments are then made considering more subjective aspects such as proprietary assets, seller synergies, or covenants restricting seller competition post-sale.

The end goal is landing a generally accepted figure allowing profits for the seller yet also viability for operations and financing for the buyer.

Step 7: Secure Financing Commitment

Research Capital Sources

  • Consider seller financing, small business loans, asset-based loans
  • Approach online alternative lenders or funds open to non-real estate deals

Prepare Comprehensive Package

  • 12-month cash flow projections and intelligent assumptions backing them
  • 3-year financial forecasts and exit strategy
  • Evidence of relevant experience and your post-acquisition plans
  • Collateral assets like personal property to strengthen applications

Apply and Follow Up Proactively

  • Submit clean, clearly presented applications addressing all requirements
  • Be prepared for complex requirements like personal guarantees
  • Follow up applications and answer any queries promptly to prioritize review

Step 8: Conduct Due Diligence and Legal Review

  • Verify financials match reality by tracing statements to source records
  • Inspect assets and inventory to ensure quality matches financial valuation
  • Check for title issues, ongoing lawsuits, or regulatory compliance gaps
  • Review major contracts for competitiveness and renewal risks
  • Check employment agreements and benefit plans are compliant
  • Scrutinize IP ownership, confidentiality protocols and proprietary assets
  • Inspect real estate through environmental studies if acquiring premises
  • Review insurance coverage levels and premium costs with brokers
  • Engage lawyer to scrutinize seller disclosure agreements for gaps or risks

Step 9: Negotiate Terms and Close the Deal

With due diligence complete, it’s time to close the sale. Some key negotiation points include:

  • Purchase Price: Try adjusting based on diligence findings. Offer earnouts tied to financial targets.

  • Payment Terms: Negotiate timing of installments to balance cash flows. Seek seller financing.

  • Reps & Warranties: Ensure disclosures covered all material risks discovered. Price protections for title issues.

  • Transition Support: Secure consultant agreements for knowledge transfer on critical functions.

  • Noncompete Clauses: Protect the business from seller competition post-acquisition.

Enlist legal/financial advisors to review draft contracts. With their input:

  • Address each party’s concerns to find mutually acceptable resolutions.

  • Stand firm where appropriate to avoid overpaying or leaving yourself exposed legally down the road.

  • Memorialize all agreed terms in detailed, thorough purchase agreements.

Step 10: Manage the Post-Purchase Transition

Managing the post-close integration smoothly sets the stage for long term success.

AreaBest Practices
LeadershipClearly define your vision, meet staff, listen to feedback.
OperationsReview workflows, ID synergies, standardize metrics tracking.
CustomersCommunicate change, emphasize continuity of great service.
SuppliersConfirm orders, pay invoices on time to nurture partnerships.
MarketingUpdate branding, streamline digital presence and lead gen efforts.
  • Address staff concerns, fill open roles to optimize operations.

  • Focus on retaining loyal customers through attentive care.

  • Oversee integration closely while avoiding drastic disruptions.

Wrapping Up

Well, there you have it – those are the 10 main steps to help you find and purchase an existing small business using alternative financing. We know it’s a lot of information to take in, but just take it one step at a time. Doing your homework upfront to understand industries, vet opportunities, and make sure numbers add up will really pay off down the road.

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    Gauri Pandian

    Gauri Pandian is a seasoned Business Development Manager with 9 years of experience in sales and client relations. Currently, she is responsible for business growth and client acquisition as a BD Manager at Zipprr, a leading custom software development firm. Prior to this, she has worked with Early-stage startups helping them scale through strategic partnerships. Gauri has a crack for understanding customer pain points and unlocking new opportunities.