By Richard Parker: President of The Business Buyer Resource Center and author of 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. Especially now, banks are simply not lending money for small business purchases. 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. 90% 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 of at least 20%.
We have been "teaching and preaching" seller financing for twenty years. Now, it is the norm, and growing dramtically everyday because traditional lenders are not lending at all. The vast majority of small business acquisitions involve seller financing.
In fact, 91% of our client's deals are done this way.
While there are no hard rules of how much you can expect the seller to finance, in the past it was generally 30% to 50% of the total purchase price. In the current market, seller financing is the only viable option and so we are now seeing deals where the averages are up to over 70% of the deal totals, and often more. 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.
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.
Note: SBA criteria change annually and can again during a fiscal year due to budgets. The information here is just a guideline. Double-check with a local SBA lender.
At the present time, the SBA guidelines have made the structure more compelling. in some cases, the buyer can have as little as 10% equity, the seller finances 15% and the SBA backs 75%.
While SBA guidelines change, here is a general overview but you need to get regularly updated information from an SBA lender when you are ready.
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, it is restrictive to get a loan and until they alter their guidleines, don't count on it.
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 I’m going to buy someone else’s business, I want to be darn sure that they’ve got a stake (or risk) in my success as well. Most importantly, in today's market, you can really leverage this aspect of the deal and get the seller to finance a major percentage of the purchase.
This article represents a fraction of what you’ll learn on this topic in How To Buy A Good Business At A Great Price© - the most widely used reference resource and strategy guide for anyone thinking about buying a business. Read a detailed listing of what you'll learn.