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Is it wise to get a loan to purchase an existing business?

Updated: 8/18/2019
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13y ago

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All things being equal, debt has the potential to increase the value of a business due to the tax shields that interest payments provide. Using debt reduces the immediate equity requirements and allows someone to reap the highest ROE possible.

However, one should only use a loan to purchase an existing business if one or more of the following (which are not exhaustive reasons) are true:

* The business is generating enough net operating cash flow to cover loan payments

* The business can be rapidly (less than 24 months) transitioned to generate enough cash flow to cover loan payments AND the proposed owner has enough cash to cover what the business is not covering for the duration

* The loan is being offered at better-than-average prices that could otherwise be had in the marketplace

* The owner has significant expertise and reach into the industry, however, has limited liquidity to purchase the business outright

*

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13y ago
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