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Raising Capital to Purchase a Business

Posted by webtech on February 22, 2012
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Did you know that most start-ups fail simply due to poor funding? Statistically, most budding businesses never get past their business plans simply because it has become increasingly challenging to convince investors to have faith in risky ventures helmed by inexperienced entrepreneurs.

Even rich companies like Google prefer buying over other businesses such as YouTube, as acquisition exercises are not only cheaper in the long run, but it will also save you plenty of time and effort in terms of developing and improving business models, branding and technology from scratch. More importantly, buying over a well-established business also means that you won’t have to wait months (or years!) for a positive cash flow.

For the rest of us not-so-wealthy individuals, raising capital for a business is a lot easier as banks will be happy to create loans for existing companies with a healthy track record. Generally, anyone can take out a 70% to 90% loan of the acquisition cost from banks. When done correctly, one might even be able to receive 100% funding to purchase a business, especially if you source for other borrowers besides banks.

Before You Buy

When it comes to business, the biggest priority is in ensuring that your chosen business venture is truly profitable. To prove this in black-and-white, you should first evaluate your business to also ensure that you are not paying too high a price for a non-lucrative business. Make it a point to investigate the past performance of the company, including the company’s turnover and current profits. Don’t rule out unprofitable businesses tho.

Besides looking at the expenses, assets and current cash flow of the company, you should also take a long, detailed look at the company’s debts as well. On the other hand, it should also be noted that company assets do not only include hardware, employees or current stocks, but also intellectual property owned by the company.

Nobody in their right mind would sell a money-spinning business to a third party stranger, so be sure to do your homework and find out why it is being sold in the first place. Just like how you wouldn’t buy a house without first checking out the neighbours, you should also initiate contact with your soon-to-be customers and suppliers as well to find out more about the company you are interested in.

After that, you can then extrapolate profit projections and work out the return on investment. If all of these instructions sound foreign or uncomfortable, then hiring a professional business broker or an accountant would be a good idea as it is essential to create a winning business plan to woo other investors and help raise capital for your venture.

How Much Can You Afford?

As the expression goes, there is no free lunch in this world, which means that while it would be great to have someone else fund your business, it would also probably mean that the bulk of the profits will also be channelled to said investors while you do most of the work. As such, we recommend that you also become monetary stakeholder in your business by investing as much money as you have to spare.

This means that you would also have to go through your own list of personal liquid assets and figure out how much you can draw out from your banking accounts such as your personal account, savings account and securities account and still have enough left to survive on for several months. A good idea would be to also liquidate an asset such as an extra car, real estate, antique or collection of valuables to help raise money for your business as well. After all, you could always re-purchase better items once your business takes off.

How to Get Personal Loans

Once you’ve concluded on how much cash you can safely fork out for your business, you might want to recruit help from your close friends and family members as well. Of course, the problem with borrowing money from loved ones is that it has the capability of upsetting the relationship, even if you end up with a pile of money with next to no interest.

For those who would like to borrow from other sources, you might consider applying for an overdraft loan from your bank. Banks also issue business loans as well, depending on the quality of your business plan or if you happen to have an impressive personal guarantor.

Other alternative sources to borrow from include taking a loan from your retirement account, life insurance policy and credit card. Having said that, we highly discourage taking loans out from these three sources as the retirement account is meant to protect your interests at old age whereas your insurance policy if meant to protect yourself from any untoward accidents or health issues. While applying a cash advance from your credit card is quick to process, the interest that comes along with the money is too expensive for most people to bear.

How to Refinance Your Assets

If you simply do not have the heart to sell off a valuable asset (like a boat, car, family heirloom or house), you might want to consider refinancing it instead, which basically means that your chosen bank or finance company owns your asset in return for lending you money. You might also want to consider applying for a home equity loan as the interest from this loan is conveniently tax deductable. Having said that, do note that the downside to this method is that failure to pay your loan off will mean that your assets will be taken over by a third party.

How to Seek Government Assistance

The good news is that both our state and local governments actively encourage budding entrepreneurs, so if you’re short on funding, you might want to look into applicable Economic Development Programs in your area. One can also borrow money from the government in the form of a Small Business Administration (SBA) loan which can vary from $5,000 to $2,000,000.

How to Seek Out Other Investors

Before you start taking your business public and selling shares to the general public, you might want to take a look at venture capitalists and angel investors instead. The former type of investor consists of investors who are solely interested in investing for profits. On the other hand, angel investors are simply individuals who have already made their wealth in the business world and would simply like to aid others in succeeding as well. Instead of profits, angel investors are more interested in having their loan returned so another budding entrepreneur can receive much-needed funding.

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