business.

Getting The Money You Need To Buy A Business

If youíre thinking about buying a business, youíll be pleased to learn that financing the purchase is generally quite easy. In fact, itís far simpler to get the money you need to buy an existing business than it is for a start up. Most people simply donít realize how to do it. Donít get the wrong idea: youíre 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 theyíre 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 ďbusiness/client friendlyĒ but try to get them to lend you money to buy a business. It wonít happen.

It doesnít matter how experienced you are, or what your relationship is with them,. Unless youíre prepared to collateralize the loan 100% with non-business and personal liquid assets, they arenít going to give you a penny. So donít waste your time seeing them. With the terms they offer, itís 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 youíre 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, itís estimated that over 80% include some for of financial aid from the former owner. While the percentages vary, itís 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 buyerís perspective, it serves to reinforce that the seller is also at risk in the transaction. Itís a perfect mechanism to help ensure that what youíve 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:

q Negotiate a holiday from any payments for three-six months after closing

q Allow for the first year to be all principal

q Have the right to make lump sum payments several times a year towards the principal

q No prepayment penalty

q You can arrange for lower payments throughout the loan with a balloon payment down the road

q While you will have to sign personally, you will not have to personally collateralize the loan. The sellerís 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.

q The good news is that there is money available; up to $1,300,000 plus additional funding should it include real estate.

q The terms for repayment are favorable-up to 10 years and greater when real estate is involved

q When a business passes the SBA qualifications, you can be fairly confident that it is a solid business

q If you do not have at least 25% equity in your home, you may not have to fully collateralize the loan.

q Typically, they will finance 70-80% of the deal.

You may be thinking, if you can make the acquisition with 20% down, why would you even think about anything else? Hereís why:

q Most small businesses wonít pass the SBA requirements

q The financial review is based upon the weakest of the past two or three yearís tax returns

q You must have demonstrative experience in a business that is similar to the one you are considering

q The will want your house, life insurance policy (possibly) and your first-born as collateral.

q It can take up to 90 days to complete the entire process.

Having said this, it is nevertheless advisable for you to explore the SBA option. Youíll want to approach a ďpreferred SBA lenderĒ. Most banks have this status. What it allows for is the banks to approve the loan on their own without having to submit everything to the SBA. If you choose this route be VERY specific in asking the lender for timelines to complete the transaction.

So Whatís Your Best Bet?

Unless youíre buying a business for under $100,000 or getting an enormous price concession, donít pay cash. As for SBA approval, while their rigid guidelines will help to confirm the viability of a business, unless youíre making an acquisition where you cannot finance the down payment, I tend to place this as my second choice.

I am a huge believer in seller financing. Itís like buying a used car with an extended warranty paid for by the prior owner. Thereís no substitute for the flexibility you can achieve, or the favorable terms, plus, more than anything else, it really forces the seller to share in the risk. If Iím going to buy someone elseís business, I want to be darn sure that theyíve got a stake (or risk) in my success as well.

Copyright 2001 Ė 2007 by Diomo Corporation Richard Parker. All rights reserved.

NOTE: The articles that appear on this website are the sole and exclusive copyrighted property of Diomo Corporation and or Richard Parker and may not be reproduced in any format whatsoever without the express written consent of Diomo Corporation and Richard Parker.

Author:.

Richard Parker is an expert in the art of buying businesses. Since 1990, he has purchased ten businesses and has started several more. He is the author of six comprehensive programs on buying businesses including the "How To Buy A Good Business At A Great Price(c)" series, and has had over 100 articles published. As President and founder of Diomo Corporation, his materials and live seminars have helped thousands of prospective small business buyers in over 70 countries realize their dream of bus...

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Have a question for Richard?

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Blair
23rd June 2014 11:45pm
Hello. I am very keen on buying this restaurant/bar which has an annual profit of around 350k. I have 60k cash but don't think I can get a business loan because I don't have any mortgage to use as security.
The loan would be paid back in only a couple of years.
Do you know how I would go about getting finance or another avenue to pursue?
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Richard
20th July 2014 12:48pm
Have you discussed seller financing with the owner?

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Chris tuttle
14th July 2014 11:20pm
I have an opportunity to buy a business that nets 200k each year and seller has 345k in retained earnings. 200k liquid in corp ck book and 340k in receivables. All real estate "factory" and tools are mortgage free. I have a purchase agreement for 1.5 million. Seller is willing to accept 1 million if needed to close this deal. And carry or forgive the second. Now I took this to my bank and even at 75% ltv they would not do this deal but really want the sellers business somehow. I feel ... Read More
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Richard
20th July 2014 12:49pm
Is the bank considering it as an SBA backed loan?

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Megan
23rd July 2014 10:41pm
I was let go from my job recently. I have 8 years experience in my field and have been wanting to start up my own business. I found a local business in the same field that is selling their establishment along with clients and equipment included. The asking price is $65,000 but they are willing to negotiate price to the right buyer with enough experience. I have never owned a business before and honestly have no money to put down. Where do I go from here and is this even a possible goal for me ... Read More

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Danny Logan
24th July 2014 4:33pm
I have an employee that is interested in buying my business- He would like to do a stock purchase to get a better price and cost less in taxes- If I provide partial financing, I do not want risk since I am ready to retire after 28 years- What are your thoughts?

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