Financing the Deal
It's fairly simple to get the money you need to buy an existing business
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If you're thinking about buying a business, you'll be pleased to learn that financing the purchase is generally quite easy. In fact, it's far simpler to get the money you need to buy an existing business than it is for a start up. Most people simply don't realize how to do it. Don't get the wrong idea: you're not going to buy a business, at least a good one, with no money down; that only happens in the infomercials.
Many prospective business buyers mistakenly believe that traditional lenders will welcome them with open arms when they present them with a business they're looking to acquire. Unfortunately, nothing can be farther from the truth. It still amazes me how the banks have got most people fooled. They run these great ad campaigns promoting themselves as "business/client friendly" but try to get them to lend you money to buy a business. It won't happen.
It doesn't matter how experienced you are, or what your relationship is with them,. Unless you're prepared to collateralize the loan 100% with non-business and personal liquid assets, they aren't going to give you a penny. So don't waste your time seeing them. With the terms they offer, it's just not worth it.
The landscape is pretty lopsided when it comes to how people buy small businesses. 90% of all transactions involve some financing. Only 10% are all cash deals. Even if you're inclined to pay all cash, my advice is not to do so, unless you get a very hefty price reduction: at least 20%.
Seller Financing
The vast majority of small business acquisitions involve seller financing. In fact, it's estimated that over 80% include some for of financial aid from the former owner. While the percentages vary, it's generally 30% to 50% of the total purchase price. When you think about the situation, it makes perfect sense. First of all, by providing financing, the seller validates the viability of the business itself. Also, the seller is able to get the highest price possible by funding part of the acquisition.
From a buyer's perspective, it serves to reinforce that the seller is also at risk in the transaction. It's a perfect mechanism to help ensure that what you've been told by the seller is true and accurate. It also serves as a mechanism to deal with situations that may arise later on that come about as a result of their actions where you may need the ability to offset their financing.
- While the terms vary for seller financing, you can expect to pay about 6-8% over four to five years. Plus, you have the ability to get far more creative with seller financing than any other:
- Negotiate a holiday from any payments for three-six months after closing
- Allow for the first year to be all principal
- Have the right to make lump sum payments several times a year towards the principal
- No prepayment penalty
- You can arrange for lower payments throughout the loan with a balloon payment down the road
- While you will have to sign personally, you will not have to personally collateralize the loan. The seller's lien is against the assets of the business.
SBA Financing
The Small Business Administration does NOT lend money for people to buy businesses. The SBA guarantees loans made by lenders (up to a certain amount) for small business acquisitions. There are both good and bad points to an SBA loan.
- The good news is that there is money available; up to $1,300,000 plus additional funding should it include real estate.
- The terms for repayment are favorable-up to 10 years and greater when real estate is involved
- When a business passes the SBA qualifications, you can be fairly confident that it is a solid business
- If you do not have at least 25% equity in your home, you may not have to fully collateralize the loan.
- Typically, they will finance 70-80% of the deal.
You may be thinking, if you can make the ac
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Richard Parker author of: How To Buy A Good Business At A Great Price(TM), the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center. Richard Parker is also the author of BizQuest's Business for Sale Blog |