How to Finance a Business Purchase
Here are four of the most common ways to finance a business purchase:
- Using Your Own Money
The easiest way to finance the purchase of a business is to use your own money. These funds may be from your savings, retirement accounts, or home equity. Many buyers use a combination of their owns funds along with other seller financing or business loan options.
- Seller Financing
Another leading method to finance a business purchase is to ask the seller to provide the financing. In this instance, the seller would provide the buyer with a loan that is amortized over a period of time. The buyer would pay the loan back, usually with proceeds from the business. A typical seller financed deal is structured with 50% down and the balance paid to the seller over a three to five year period. This type of financing is easier to get than conventional financing, which are nearly impossible to get for a business and a seller financed loan is more flexible.
- Bank Loan
A bank loan may be one of the more difficult types of loans to acquire. Usually, banks finance a purchase of a business by the existing assets of a business and not based on the plans of a business. Therefore, to get a conventional loan you must have a substantial amount of assets, good personal credit and a solid track record in the industry.
An interesting point to note is that banks do, however, take advantage of the Small Business Administrations’ (SBA) government guarantee program to lend money to individuals purchasing businesses. This allows the buyer to put as little as 10% down towards the purchase.
- Leveraged Buyout
A leveraged buyout enables buyers to maximize their returns by minimizing the cash they invest. While leveraging assets can increase returns, if the business doesn’t perform well, it can also maximize the losses and have a negative impact on your rate of return.
- Other Options
Business sales can be structured in many ways. There are some additional options for businesses that are high risk, such as those with only one large customer, declining sales year after year, or those who’s business is dependent on current owner, or ones in which the business is showing exponential growth with large contracts in place. In these types of business sales, earn outs offer a solution.
Earn outs are a provision written into some financial transactions where the seller of a business will receive additional payments based on the future performance of the business sold. Here are two examples of earn outs:
High risk – Typically in this situation, the buyer would make a small down payment, and then payments over time based on the success of the business. The seller is not guaranteed anything beyond the down payment. If the business fails then the payments aren’t owed.
Exponential Growth – In this instance a large portion of the purchase price is paid in cash at closing while the balance is based on the success of the business going forward over a set period of time.
Ready to Buy?
If you are ready to buy a business, a business broker can be your best asset. A certified business broker will be well versed in the ins and out of buying and selling businesses. Not only will he introduce you to businesses that match your individual interests, goals and capabilities, he will be an integral part of the buying process, tailor agreements and financing to meet the needs and best interests of all parties involved. Plus, your certified business broker will help you eliminate bad transactions so that you’ll never have to settle for an acquisition that causes you more stress than its worth in profits. If you are ready to buy a business, a certified business broker will help you navigate through the complex world of acquiring a business. Get started today!
Cress V. Diglio, Florida Business Broker
Cress V. Diglio is a Certified Business Intermediary (CBI), a Merger & Acquisition Master Intermediary (M&AMI) and the Past Chairman of the International Business Brokers Association (IBBA).
Whether you are looking to buy a business, sell your business or merge with another business, Florida Business Broker Cress V. Diglio has the experience to assist you in all facets of the transaction. Call Cress today for complete transaction support and expertise, 888-984-4208, or visit https://floridacertifiedbusinessbroker.com.