Financing A Business Purchase

Anyone interested in financing a business purchase in the past year or so knows how difficult it can be to accomplish that objective. The problems that hit the banking industry with the mortgage meltdown starting in 2007 have made most loan officers very cautious about lending to entrepreneurs wanting to buy small or mid-sized businesses for sale in California. And the impact has been experienced in a slower rate of business transfers over the past couple of years.

But resourceful California entrepreneurs are not waiting for a return to the old days when lenders were more eager to cooperate, and there was plenty of home equity to use as additional collateral. They are pursuing other avenues to get the cash needed to conclude their transactions.

Two of the most widely used strategies are:

1. Increased use of seller financing. The number of sellers insisting on all-cash deals has declined over the past year or so. Business owners ready to retire or move on to another enterprise are discovering it may take a very long time to find a buyer willing and able to comply with that difficult requirement. And most likely, the buyer able to cash out the seller will insist on a substantial price discount.

Along with the change of heart among sellers about helping to finance, now that bank loans aren’t as easy to come by, is an increase in the amounts that finance-willing sellers are agreeing to lend, as a percentage of the total price.  The amount of seller loans, which averaged one-fifth to one-third of the total price up until about two years ago, is now in the 25% to 40% range. Sellers may not like the idea of getting less money at close of escrow than did the entrepreneurs who sold before the financial crisis. But increasing their assistance to a buyer who is financing a business purchase, may mean the difference between selling and not selling a business.

2. Smarter loan applications. And the difference for the buyer, between making and not making a purchase, can depend on how well a loan application is prepared. The SBA has been working hard, and getting some Congressional support, to persuade its preferred lenders to offer SBA loan programs to small business owners who want to expand, or entrepreneurs who want to purchase a small business.
   
Even with some purchase money available through these programs, the challenge is getting your application accepted by a lender. Responding to that challenge, and with the aid of smart California loan brokers who specialize in working with the SBA programs, applicants are getting better at submitting applications that get the stamp of approval.

For one thing, buyers know they’re much more likely to get purchase money funds when their background matches the industry in which the business is involved. SBA loan backed lenders take their cue from the federal agency, which strongly favors the idea of business buyers doing exactly what they do best, rather than plunging into unfamiliar waters when they buy a business. The applicant with a retail food service background has a better chance of getting funds to buy a restaurant than does the person whose experience involves industrial engineering. And it’s common now for a loan applicant to include a business plan, demonstrating to the lender that the borrower has thought about how to operate the enterprise and to make sure it produces enough cash to repay the loan.

Additionally, many buyers are getting in the habit of pre-qualifying for SBA loan programs, even before a suitable business is found. This approach enables the buyer to learn how much she can borrow and to fine-tune the application for a specific business, once it is identified. Pre-qualification also is a smart negotiating strategy for the person who’ll need help financing a business purchase. Once given the general “green light” by a lender, the buyer usually can expect a fast response when requesting funds for a specific purchase. That means she’ll be prepared to proceed with a deal before other potential buyers have made much progress at finding the money--a strong selling point when discussing price and terms with the seller.

While financing a business purchase has become more difficult in the current economic environment, resourceful Californians still are finding ways to access the needed money.

About the Author:  Since 1994, Peter Siegel, MBA has been assisting business buyers with business purchase financing solutions and financing pre-qualifications. For more information on business purchase financing go to BizBuyFinancing.com. Peter Siegel, MBA can be reached direct at 866-270-6278.

Posted on December 6, 2011  |   Email This Blog Post   |   Print This Blog Post   |  All Contributions From Peter Siegel, MBA