Learning about financing business purchase deals can be a challenge for some business buyers interested in buying a California small business. There are different methods, none of which is like taking out a 30-year mortgage to purchase a home or buying a car with an auto dealer loan.
The three most common methods business buyers use to source the money needed to buy a business are:
1. The buyer's cash-- By selling off stocks or other assets, or dipping into savings, some buyers of small California businesses are able to come up with the money needed to cash-out a seller and take over his company. As in most economic endeavors, the person with the cash has a lot of control. And the buyer who can complete a business purchase with her own resources, is in a position to influence the price.
That's the bad news for sellers--usually having to come down on the asking price to get a buyer whose approach to financing business purchase deals is simply to write a check for the full agreed on amount. But the seller enjoys benefits too. They include getting all the money up-front for use in other investments, and not having to worry--as he would in a financed deal--about whether the buyer will be successful in the business and able to make the payments.
2. Seller financing--An increasing number of small business transactions are constructed to allow the buyer to put some of the purchase price into escrow, when the deal is completed, and owe the seller the difference between agreed on price and the amount of that down payment. Typically the buyer will pay more for the company, with seller financing included, than he would if willing and able to have the seller take all cash. Buyers usually opt for some seller financing because it means the seller still has a stake in the success of the company. If the buyer runs into problems managing the business, he usually can count on help from the seller to whom payments are being made.
Ordinarily, the loan security for the seller is the assets of the business, with escrow filing a security agreement showing the seller as having an interest in the company's hard assets.
3. Bank financing. The other common method of financing business purchase opportunities involves the use of a lender, usually a bank working with the Small Business Administration to offer SBA loan programs. The campaign of the Federal government to boost the economy has included efforts to provide money to small businesses, and the key instrument has been the
SBA loan initiatives. That means these loans are easier to get than they were earlier in the recession.
Buyers of small businesses should understand, however, that the requirements for these programs are fairly specific. Buyers need to complete a great deal of paperwork, including submission of a business plan. And the applicant for an SBA-backed loan needs to clearly demonstrate the ability to pay back the loan, and satisfy the lender that he, or she, has experience directly applicable to the business being purchased.
One or two of the most common methods for financing business purchase transactions are used in nearly all of the deals closed on small businesses in California. Those involving two of the approaches--seller financing and a bank loan--in one deal, account for at least 40% of the state’s completed business sales.
About The Author: Peter Siegel, MBA is the Founder and President of BizBen.com and is a SBA Loan Consultant & Broker specializing in SBA loan financing for business purchases. He has coordinated SBA loans for business acquisitions and partner buy-outs since 1994 and currently works with over 20 national and local SBA lenders and financial institutions. Mr. Siegel provides SBA loan pre-qualifications and advises business buyers, business owners, and business brokers. He can be reached directly at 866-270-6278.
Posted on March 23, 2011 | 
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