Finding Loans to Buy a Business – Leverage Buyout Financing
Judy Jandro, Vice President of Small Business Lending
What is a leveraged buyout (LBO)?
If you’re looking to buy a business or execute an ownership transition but don’t have the cash on hand, you may have the option to finance part of the purchasing price from the seller (a.k.a seller financing) or via another source such as a bank or a financing institution. LBOs are often executed by buyers who are unwilling or unable to pay for the business entirely in cash at closing.
Acquisition loans are often secured by your target company’s assets (including receivables, equipment, inventory, real estate) or cash flow (future earnings). Potential lenders, therefore, look at your assets and cash flow as well as any debt you have in order to decide if you are eligible. Often there will be requirements for the debt to equity ratio that must be maintained, similar to how, when buying a house, lenders expect a certain percentage as a down payment.
How do you prepare for an LBO?
In every LBO, you will first need to satisfy the lender’s requirements for the loan. Your assets and/or cash flow, whichever the loan is based upon, must be in line with the price of your acquisition and sufficient to protect the lender and address any preexisting debt.
Speaking with an experienced lender such as CRF can provide insight on what valuations are “typical” for business acquisitions in the market today. As with any asset, the prices business owners are willing to accept to sell their companies fluctuate with changing economic conditions. In a good economy, credit is often easier to obtain, which drives valuations higher. In a down market, there are often great deals to be had… if you can assemble the financing to make them happen.
Considering an LBO to buy a business? Here’s how CRF can help.
For more than 30 years, CRF has supported the growth of small businesses in historically underserved and underinvested communities across the country. As a leading Community Development Financial Institution (CDFI), CRF supports mission-driven organizations by helping to increase the flow of capital to the companies and communities that need it most. Few other lenders follow our model; in fact, CRF is one of only three authorized nonprofit small business lending companies in the U.S., and if it looks like the best option for you, we can help you negotiate an SBA 7(a) loan that suits your business acquisition needs.
In addition to providing loans, we are here to help. CRF’s experts can help you explore the various financing options that are available to you. We get to know our clients so as to best nurture lasting stability and growth in their communities, and we’re excited to get to know you.