There are various options open to a potential buyer to fund the purchase of a business. Below is an overview of the different options and an explanation of the financial terminology often used.
One common source of funding is through the use of a bank loan, often referred to as 'debt finance'. Before agreeing to any loan the bank will commonly wish to perform their own investigations as to the financial viability of the business to be bought. In return for the finance the bank may want to obtain various forms of security for the repayment of the loan. This may take the form of a charge over the assets or the whole undertaking of the business to be purchased. They may also ask the owners of a business to enter into a personal guarantee to repay the loan should there be any default.
'Asset finance' is another method of funding the purchase. Similar to 'debt finance' a lender will provide funding for the purchase of an asset or series of assets. The lender may take ownership of the assets to be purchased or may obtain a charge over them as security. The buyer will make set regular payments to the lender to cover the cost of the asset. This method enables the buyer to purchase the asset without the burden of making one large one off payment.
Under 'equity finance' a buyer raises the funding needed from external investors. In return for their investment, the investor will obtain a share of the ownership of the business and perhaps a degree of control over how the business is run. No repayments are necessary. The investor simply gets to enjoy the benefit to his investment should the business grow and may be granted a preferential right to any dividends.
Finally, with 'vendor assisted finance' the seller helps the buyer make the purchase of its business. This could be done through various schemes. The seller may allow the buyer to make deferred affordable payments over a period of time for the price of the business, or the seller may make a loan to the buyer for the purchase price for the buyer to repay at a later date. Another method is through 'earn-out' provisions. Under this scheme the buyer must only make further payments should the seller meet various future targets. Such targets could be based on the financial value of the assets in the business post completion of the purchase, or, if the seller is to still be involved in the business after the sale, the reaching of certain sale targets.
Deferred consideration may also be an option for both parties with the likelihood that the seller would want to protect the payment of the deferred consideration by way of security.
A member of our specialist Business Law team can provide advice as to the funding options available and the terms of any funding agreements.
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