In the controversy over how best to get into business ownership--buy an existing enterprise or start from scratch--the most important and most overlooked aspect is whether you can “take it to the bank.”
As people emerge from corporate employment, or from school, looking to be in business for themselves, many wrestle with this question. The benefits of taking over a going concern, including a track record with exiting customers, employees and vendors, plus a known name and instant cash flow, are up against the reasons to launch an enterprise: You don’t have to buy goodwill, and can enjoy the pride of having created a running business from just an idea.
Often forgotten in this debate is that no matter which strategy is pursued, if money is needed to make it work, the far better option is to find a
business for sale to purchase. That’s because the entrepreneur planning on finding a suitable business offering has a greater chance of getting the help of a lender, than the person who asks for funding to carry out a business idea.
Here are a few reasons that “borrowability” is greater when an existing business is involved, and suggestions for using the reasons in the campaign to get a business loan.
1. That track record of an established company, even if it isn’t perfect in every respect, will open banker’s doors more readily than an idea about what “could be.”
Suggestion: Borrowers are advised, when requesting financing, to provide a business plan that summarizes the company’s performance during the past few years so any interested loan officer can be satisfied that the enterprise is equipped to keep clients, manage expenses and show a return.
2. Expectations for the future are the companion to the track record. The would-be borrower stands little chance of getting funds for a start-up because the business projections are based on the borrower’s speculations. Lenders only survive if they’re very careful to avoid risky propositions. So a loan granted to an owner who can’t rely on past experience to guide the company’s way into the future, often looks, from the viewpoint of a bank, like a gamble.
Suggestion: Any buyer seeking funds to complete a deal should consider how to show prospective lenders that positive trends observable in the company’s recent past will help give direction for the future, and any parts of business that have been a disappointment--income areas with poor results, and expense items that seem too costly--are subject to change going forward.
3. A common feature in many transactions involving the sale of a small business is seller participation by carrying back part of the purchase price.
The willingness to
sell a business by providing financing sends a signal as clear as a green light for other lenders to proceed. It’s reassuring for the loan officer to notice that the person who knows most about the business is staking money on the buyer’s chances for success.
The start-up operator has no similar way to demonstrate to prospective sources of borrowed funds that their decision to participate probably involves little risk.
Suggestion: Here’s a negotiating point when persuading a seller to help finance: Such a demonstration of faith in the buyer will increase the likelihood that another lender will be ready to provide the cash needed to complete the deal.
Future business owners not sure whether to pursue a start-from-scratch plan or
buy a business, ought to give serious consideration to the “borrowability” factor.
See all contributions from Peter Siegel
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