Many people dream of owning their own businesses. But the idea of buying an existing business is often brushed aside due to the perceived notion that it will take more money than what’s available.Many are unaware of the financing options that exist. Each option has different requirements in terms of down payment. The following are guidelines of a few scenarios, although all business transactions are open to negotiations and adjustments for a business acquisition loans.
1. Seller financing
In many ways, this is the simplest form of financing a business purchase. The buyer pays a cash down payment to the seller, acting like a bank, finances the remainder of the purchase, with payments made to the seller over time. The initial down payment in this case is purely negotiable. I tell buyers that it can be as much as 50 percent down, but in the end it’s whatever is agreeable between the buyer and the seller.
The remaining amount to be paid to the seller can simply be in the form of a promissory note with equal payments for a set period where payments are tied to performance of the business going forward. This benefits the buyer because the seller has a strong interest in seeing the business succeed under the new management. The seller’s financing is a flexible option, because terms are fully negotiable between buyer and seller. It can also be the quickest route to a closing.
2. Bank financing
In purchasing a small business, you are buying a cash flow stream more than you are purchasing hard assets. Because of this, business acquisitions are more appropriate for an SBA 7a business acquisition loans than they are for traditional financing. The SBA 7a is a government loan made by a private bank. The program is in place to encourage banks to lend in situations where physical assets might be minimal.
A typical structure is a 20 percent down payment from the buyer, a 10 percent carry (seller note) from the seller, with the lender contributing 70 percent paid to the seller at closing. This is a good way for the buyer to leverage their capital and for the seller to get as much cash at closing as possible. There are certain terms are that are dictated by the SBA, so there is less flexibility to how the buyer and seller structure the deal.
3. Alternative options
In situations where asset value is close to the purchase price, conventional bank loans and equipment financing can be a feasible options. In this case, the buyer obtains money from the bank with the assets as collateral, then the buyer pays the money to the seller.
Generally speaking, when I meet with a buyer, I tell them to anticipate putting 20 to 50 percent of the purchase price as a down payment for business acquisition loans. This gives them a more realistic parameter to keep in mind as they are searching listing sites and looking for their next opportunity. Remember that your finance options and that all business transactions are open to negotiations and adjustments.