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Financing The Deal
By Richard Parker, President of The Business
For Sale Buyer Resource Center™ and author of
the most widely used reference resource and
strategy guide for buying a business for sale –
How To Buy A Good Business At A Great Price©
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 further 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. 80% 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 form
of seller financing. 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 $2,000,000 (as of this
writing – but it does change) 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 a certain amount of
equity in your home, you may not have to
fully collateralize the loan.
- Typically, they will finance 70-90% of
the deal.
You may be thinking, if you can make the
acquisition with 20% down, why would you even
think about anything else? Here's why:
- Most small businesses won't pass the SBA
requirements.
- The financial review is generally based
upon the weakest of the past two or three
year's tax returns – not any “owner to
prove” documentation.
- Most lenders require that you must have
demonstrative business experience in a
business or job function that is similar in
scope to the one you are considering.
- Although each lender differs they will
want your house, life insurance policy
(possibly) and your first-born as
collateral.
- 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.
You'll 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 What's Your Best Bet?
Unless you're buying a business for under
$100,000 or getting an enormous price
concession, don't pay cash. As for SBA approval,
while their rigid guidelines will help to
confirm the viability of a business, unless
you're 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.
It's like buying a used car with an extended
warranty paid for by the prior owner. There's 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 you're going to buy someone else's
business, you want to be darn sure that they've
got a stake (or risk) in your success as well.
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