Small Business Investing
Investing in a Small Business
What are the two principal ways to acquire a private company?
Some companies may be averse to taking on any debt, or dealing with the often stringent financial reports that banks or lenders require. If a company has a great cash flow and a solid client base, a bank typically will make a secured loan (with some form of collateral) of approximately 70% of the company’s current accounts receivable without an exchange of equity, but with interest and strict repayment/default terms.
Some private company owners may prefer to give up equity rather than obtain a loan. Or perhaps the business owner cannot qualify for a loan, a fact that will be apparent when you see the company’s financials. If the business cannot qualify for an external loan, it may be a red flag of a rather large problem, or indicative of a large opportunity in which to invest, depending on your analysis of the target company.
The two principal ways in which an investor may acquire a company are to acquire stock or equity in the company, and to acquire a company’s debt. In many cases, investors could use a combination of both acquisition methods.