Financing The DealIf 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 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 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%.
The vast majority of small business acquisitions involve seller financing. In fact, itís estimated that over 80% include some form 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.
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.
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.
About the Author
Richard Parker is the author of How To Buy A Good Business At A Great Price ©, the most widely used reference resource and strategy guide for buying a business. This comprehensive simple to follow guide contains 420 pages of expert tips, proven strategies and winning negotiating techniques. Mr. Parker has purchased ten small businesses in the past 14 years. As President and founder of Diomo Corporation - The Business Buyer Resource Center, his materials have helped thousands of prospective small business buyers realize their dream of business ownership (click here to read some of their stories). His programs are sold in over 50 countries. Available in hard copy or via immediate electronic download. To order a copy click here. Review the complete course outline.