If youre thinking about buying a business, youll be pleased to learn that financing the purchase is generally quite easy. In fact, its far simpler to get the money you need to buy an existing business than it is for a start up. Most people simply dont realize how to do it. Dont get the wrong idea: youre 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 theyre 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 wont happen.
It doesnt matter how experienced you are, or what your relationship is with them,. Unless youre prepared to collateralize the loan 100% with non-business and personal liquid assets, they arent going to give you a penny. So dont waste your time seeing them. With the terms they offer, its 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 youre inclined to pay all cash, my advice is not to do so, unless you get a very hefty price reduction: at least 20%.
The vast majority of small business acquisitions involve seller financing. In fact, its estimated that over 80% include some for of financial aid from the former owner. While the percentages vary, its 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 buyers perspective, it serves to reinforce that the seller is also at risk in the transaction. Its a perfect mechanism to help ensure that what youve 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 sellers lien is against the assets of the business.
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? Heres why:
q Most small businesses wont pass the SBA requirements
q The financial review is based upon the weakest of the past two or three years 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. Youll want to approach a preferred SBA lender. 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 Whats Your Best Bet?
Unless youre buying a business for under $100,000 or getting an enormous price concession, dont pay cash. As for SBA approval, while their rigid guidelines will help to confirm the viability of a business, unless youre 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. Its like buying a used car with an extended warranty paid for by the prior owner. Theres 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 Im going to buy someone elses business, I want to be darn sure that theyve got a stake (or risk) in my success as well.
Copyright 2001 2007 by Diomo Corporation Richard Parker. All rights reserved.
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