If you are considering buying a small online business, one of the biggest questions to answer is how to finance the acquisition. Fortunately, there are a number of different options available to you, depending on your needs and circumstances. Understanding what those options are can help you find the best financing for your specific situation. 

In this article, we first discuss the pros and cons of buying a small online business. Then, we cover some of the financing options that may be available to you, including:

• Personal wealth
• Borrowing from friends and family
• SBA loans
• Seller financing
• Bank loans

Related Article: How To Determine The Value of a Small Business

The Pros and Cons of Buying a Small Online Business

Before you move forward with securing financing, it is important to consider the pros and cons of buying a business. After all, buying a business may not be the right decision for everyone. You may be better off staying with your current career. Or if you do want to own and manage a business, it may be to your advantage to start a business from scratch instead of buying an existing company. 

Below, we look at some pros and cons of buying a business. As you read, think through each one to see if it applies to your situation. 

“If you are considering buying a small online business, one of the biggest questions to answer is how to finance the acquisition.”

Pros

Buying a business can help you:

• Skip the start-up hassle
• Achieve quick profitability
• Realize a high ROI (return on investment)
• Reach your lifestyle goals

Skip the start-up hassle

Starting a business from scratch can be exciting and fun. It also requires a ton of hard work, time, and energy. It will require you to put in long days, overcome huge obstacles, and face numerous stressful circumstances. 

What’s more, you will have to do all of the above while (likely) earning no money from the business, at least in the beginning. In addition, you will have no guarantee of success; many small businesses fail in the first few years. 

Working long hours and handling stressful situations without a guaranteed payoff can be daunting for many people. By choosing a business that has a proven product-market fit, stable income, and a dedicated customer base, you can avoid the stress of the start-up stages and secure a much stabler income stream right from the beginning.

Achieve quick profitability

Many new online businesses don’t turn a profit until months or years down the road. In the initial stages, much of the profit is reinvested back into the business to develop new products, expand the customer base, and fuel growth.

When you buy a successful, established business, you will likely be able to derive an income from the business immediately. If this is one of your goals, buying a business might be the right option for you. 

Realize a high ROI

Compared to other investment opportunities, buying an established online business can be extremely profitable. For starters, you have the opportunity to fuel growth after acquisition in order to resell the business for a much higher amount in a few years time. Or, if you prefer, you can drive growth and hold onto it as a long-term income source. 

Even if you make no changes to the business after you acquire it, the right acquisition can still provide you with a very high ROI.

“Compared to other investment opportunities, buying an established online business can be extremely profitable.”                                                                                                           

Reach your lifestyle goals

Many people are motivated to buy a business in order to transition out of a nine-to-five position and bring more freedom and flexibility to their lives. Buying and owning an online business opens up exciting new lifestyle options and control over your work-life balance.

While running a business does usually require some work on your part, it also allows you greater control over when and where you work. Want to carve out time to drop your kids off at school and pick them up, coach their sports teams, or generally have more time for your family? No problem. Or, do you dream of working remotely while traveling the world, living in a new country or city every few months? That is also a possibility when you run a profitable online business. 

Between achieving quick profitability, enabling a high ROI, and opening up freedom and flexibility in your work schedule, it is easy to see why so many people are interested in buying an online business. 

Cons

Despite the obvious benefits of buying a business, it still does come with some challenges to be aware of. These include:

• Higher start-up costs
• Less creative direction over the initial business direction
• Uncertainty and risk

“Fortunately, there are a number of ways to finance your acquisition.”

High start-up costs

When you buy a business, your start-up costs to purchase the company will be much greater than if you started it from scratch, financially speaking. For some, this may not be an issue. For others, funding the purchase of a business can feel overwhelming.

Fortunately, there are a number of ways to finance your acquisition. We will take a look at some of the most popular options available to you in the next section. 

Less creative direction over the initial business direction

Starting and running a business is a highly creative endeavor. If you start a business from scratch, you have a very high degree of control over its direction and tone. You can choose the products, branding, message, and values of the business. For someone who truly enjoys the entrepreneurial lifestyle, this is a big draw. 

When you buy a business, many of these fundamental components are already in place. As such, you have less control over creative direction. Of course, as the owner you do still have creative license, but you may be more restricted than if you started and managed the business from the beginning. 

Uncertainty and risk

Owning and running a business always entails some level of risk. Compared to a salaried position at a highly stable company, most small online businesses have a greater chance of failure. As an entrepreneur, this is something you will need to be comfortable with. 

However, it is important to be real with yourself about the risks of buying and running a business. Are you in a position to take on this added responsibility and risk? Will you be able to sleep comfortably at night? By understanding the risks of being a business owner, you can make an educated decision about whether buying a business is right for you. 

Five Ways to Finance Your Small Business Acquisition

Below, we explore five different options for financing your business acquisition. They include:

• Personal wealth
• Borrowing from friends or family
• SBA loans
• Seller financing
• Bank loans

Personal wealth

Depending on your financial situation and the size of the business you are considering purchasing, you may be available to finance an acquisition with your own personal wealth. Of course, this option may not be available to everyone, especially if you are just starting your professional career.

Paying cash to finance an acquisition comes with its fair share of advantages. It allows you to skip the process of securing financing, simplifying the transaction process. As with buying a house, an all-cash offer is generally more appealing to the seller compared to a financed offer. This will give you a leg up over the competition as you seek to be the winning offer. 

“As with buying a house, an all-cash offer is generally more appealing to the seller compared to a financed offer.”

Borrowing from friends or family

If you don’t have a pile of cash available to finance the acquisition, it may be possible to borrow money from your friends or family. For some, they may simply want to see you succeed. Others may want some form of compensation for their money in the form of interest or some ownership over the business. 

If you have willing friends or family members with available resources, borrowing from them can be easier than securing other forms of financing. At the same time, it is important to be aware of the potential consequences of mixing friends and business. If the business goes south or otherwise suffers, it can strain or complicate the relationship. 

While some relationships have soured by mixing them with business, it does not mean you are consigned to that fate. There are many instances of business deals financed by friends or family that turn into successful and profitable ventures, strengthening the relationship in the process. 

SBA loans

There are still a number of financing options available to you even if you don’t have access to personal wealth or loans from friends and family members. Perhaps the most popular option is Small Business Administration (SBA) loans. The SBA is a US government entity that provides support to small businesses, including loans and financing. 

“With the right approach and guidance, SBA loans can open up exciting new opportunities for anyone interested in buying a business.”

SBA loans allow you to purchase a business while only putting down as little as 10 percent of the purchase price. For example, if you want to purchase a $500,000 business, you have the opportunity to put down $50,000 and take out a loan for the remaining $450,0000. Depending on the cash flow of the business, it could be possible to recoup your initial $50,000 payment within several months, and then pay off the rest of the loan with business income over the remaining term of the loan. 

There are several criteria you must meet in order to be approved for an SBA loan. In broad terms, these include:

• The business must be able to repay the loan
• You must be personally and professionally qualified to run the business
• The deal structure must be correct

Securing SBA financing does add some complexity to the acquisition process. But with the right approach and guidance, SBA loans can open up exciting new opportunities for anyone interested in buying a business. 

Seller financing

Seller financing can be another great way to fund a business acquisition. There are many ways to structure a seller-financed deal. In general, however, it involves paying a portion of the final purchase price up front, with the remaining portion paid directly to the seller over time. In this scenario, the seller is delaying payment, essentially giving you a loan to finance the purchase.

Generally, the seller will ask for something in return, whether it is a continued stake in the business, a percentage of future profits, or interest on their loan. Often, seller financing deals are less attractive to business owners, and they may only entertain such offers if they have limited other options available. 

“Often, seller financing deals are less attractive to business owners.”

Bank loans

SBA loans are not the only form of loans available. Bank loans and personal loans can be great financing options depending on your situation. As with SBA loans, the lending institution you go with will have certain criteria you will need to meet in order to win approval, including good personal credit or a high credit score. They may also require you to put down collateral for the loan or a large down payment.

If you are interested in exploring bank loans to finance your acquisition, speak to your bank or credit union today to learn more about what your options are and what their requirements entail.