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Experts Panel - Employee Financing Ideas For Owner Buy Out

Our BizBen Panel of Experts was consulted on a problem posed by a visitor to our site, who asked what to do about selling her flower shop, considering that she has a manager who is interested in buying it and would be good at running it, but lacks the funds to make that happen.

If the business brokers, attorneys and other business sales professionals on our panel were Wall Street bankers, their solutions might have been limited to a few ideas, all providing maximum benefit for the consultants.
Instead, our panel members demonstrated a considerable amount of creativity along with the desire to be of service to the client.
Steve FitzGerald, a broker with Acquisition Services Group in San Diego, noted how difficult it is to find willing lenders and recommended that the seller find a business broker or mortgage broker who would know “which institutions still have an appetite for SBA loans in the current environment.”
The idea of a “partnership” was advanced by Harry Sidhu, President of Mission Peak Brokers in Fremont.  He was considering innovative solutions and commented that “there are several ways of putting this deal together.”
“Selling a minority interest” which would enable the seller to begin retiring, while the buyer was assuming more responsibility and working on getting a loan to complete the buyout. That was an idea from Roseville Attorney, Joe Sandbank.
Business Team Vice President Greg Carpenter provided an extensive list of ideas for getting the funding and suggested the solution might call for a “combination of (financing) tactics.”
Sobhi Michail of Sunbelt Business Brokers in Southern California, had the thought that the seller might go ahead and get a business loan which might then be assumed by the buyer as part of the purchase price.
And most professionals who contributed ideas recommended hiring a business broker for the purpose of, as James Kwon of America Realty in Los Angeles advised, “determining market status, price, bank loan…”
Business Team’s Aron Culver, located in Roseville, advanced an idea particularly non-self serving by suggesting the seller get business broker assistance “at a discount from a full commission sale since the seller is already providing a qualified buyer.”
A valuable perspective was offered by Gregg Tobin, President of Pacific Coast Business Brokers in Orange County. He pointed out that the “seller can’t afford to lose any more time in hoping the manager receives financing…” And he noted that “You may also find your manager gets more motivated to find financing if she knows that you are using the services of a broker.”
The panels’ contributions were summed up in the advice of Randall Barondess, Director of Troop Business Services in Westlake Village, who pointed out that the buyer’s “character and knowledge of industry is just as important as money” and then reminded BizBen visitors that “business is business.”
Here is the question, and responses from panel members:

From BizBen blog reader:

"I’ve been trying to sell my business to my manager for about a year. She has been trying to get a loan for that purpose, but with no luck. I keep working with her, hoping she’ll come up with the money, because she has a good credit record and there are a lot of assets in the business which could be used as collateral. And I know she’d be successful. Is there something else we can do to get the money? Or should I tell her I’m sorry but I’m going to list with a broker?"



From the beginning; question is not clear at all.

As of today's bank loan, there are two major different business loan types:

1. SBA Loan  / mostly request 3 years seller's income tax return & 3 years buyer's income tax return. Buyer's experience, FICO scores, buyer's house lien if buyer has house or property

2. Regular Business Loan. Other books and records, such as business checking account statements, credit card sales statements, employee wages, profit & loss, etc  More focus on cash flows in business.

Question does not clear up what type of loan and how much down payment, loan request amount, etc.

It will vary from all different banks requirement and point of views.

So, if manager cannot get the cash to pay seller:

Better hire business broker who knows about bank loan and ask broker about getting cash to help the buyer.

Seller can only depend on a willing to buy; this buyer NOT able to buy.

Give manager time limit such as 30 days. If not met, seller may put on the market through to find a buyer who is able.

Even using a public website such as BizBen for advertisement, seller needs to hire broker immediately to get consultation regarding market status, price, bank loan with highest down payment required from a  buyer, with the best FICO score, making it easer to transfer the lease, etc.

It is not a good idea to keep one buyer for their loan approval forever.

Move on with professional broker and get a right buyer who is willing to buy, and able to buy.

Details on dollar amount was not included in question but if seller wants to have detailed consultation, feel free to call me.

James Kwon at America Realty Los Angeles


A person’s character and knowledge of an industry is just as important as money.  No savvy business owner should ever consider carrying a note of any sort unless the person is highly qualified, knowledgeable about the industry, and a trustworthy individual.  Since the owner “in this case” knows this person, it actually provides an additional comfort level in doing business with them.  However, business is business and in every purchase, the buyer needs to have some “skin” in the game which creates accountability and ownership.   Collateral comes and goes and can change based on earnings, debt and equity. Reasonable down payments in business acquisitions are essential.

If the business has current inventory which is not encumbered, the business may qualify for inventory financing to provide working capital.  If the buyer has looked into an SBA loan which was declined, there are organizations like the San Fernando Valley Economic Development Council or the SBDC (Association of Small Business Development Centers) which may assist a buyer with obtaining a sub-prime business loan.  The SBDC is a collaborative and associated with the Small Business Administration.   Let’s not forget another hurdle in buying a business, that the buyer must qualify for the lease or rental of the location.

Randall Barondess At Troop Business Services


The list of funding sources for the buyer include:



work with an SBA loan packager to package and shop the loan to SBA lenders

equipment lease

seller can get an SBA loan then the buyer can assume it

seller note

buyer finds partners

buyer uses qualified retirement funds with intermediary such as Benetrends

buyer may qualify for a personal line of credit

some cities have small business loan programs for redevelopment areas

Bank of Mom and Dad

hard money lenders

credit cards


seller retains a portion of equity

angel investors (depending on type and size of business)

Private Equity Groups (if middle market business)

Some combination of tactics may be able to finance the sale for the owner and his manager, depending on the size of the business, the leveragable assets of the business, the resources of the buyer and his friends & family, the quality of the earnings and financial statements of the business.

Greg Carpenter At BTI Group M&A - Business Team


If the business is profitable , maybe he should try to get business loan or line of credit and have the manger assume it.

Sobhi Michail at Sunbelt Business Brokers

Here is what I would recommend to her:

Get services of an experienced business broker. There are several ways of putting this deal together. First: Arranging SBA loan with sufficient down payment and putting up business assets as collateral. Second: If buyer is short of down payment, look for a possible partnership. Third: Finding independent buyer eligible to close this deal.



Not sure where you are trying to source the loan, but generally speaking SBA lenders look very favorably at arm’s length transactions where the purchaser has been the general manager of the business for several years. They welcome the fact that the manager knows the business and often there is additional cash flow available as the selling owner’s position does not need to be replaced. The manager needs to have a good credit score and a personal financial statement that evidences sufficient cash for a 15% deposit on the purchase price of the business. The SBA lender will also have a business valuation done, so the cash flow of the business together with the assets need to justify the price being paid.

The challenge is finding an SBA lender that is still lending. All the large banks say they do SBA loans, but in our experience they tend to be cumbersome and frustrating to deal with. You might want to consider approaching a commercial mortgage broker or business broker in your area. They should know which institutions still have an appetite for SBA loans in the current environment.

Steve FitzGerald At Acquisition Services Group


First, I would take a fresh look at the lending market. With the SBA easing some lending restrictions, applications that were denied within the last year may have new life. Whether you sell to an insider or a third party, you should expect to carry a significant portion of the financing. Another option might be selling a minority interest in your business to the manager, with the idea that the manager can qualify in a year or two to get financing to complete the buyout. Some other methods of getting your money for the business when selling to an insider while minimizing the tax impact of the transaction involve using deferred compensation and retirement plan contributions. In any event, you should seek out an attorney, CPA, or other professional that can advise you about your exit planning options.

Joe Sandbank - Law Office of Joe Sandbank



Before talking to a business broker to list the business on the open market, I would strongly suggest talking to a business broker that is familiar with the loan process and creative deal structure first.  An experienced broker will have a database of lenders that are still lending, even in this economy.  Although, loan requirements are much tighter than in recent years past, loans are still getting done for buyers like this who have good credit and direct industry experience.  A little creativity with the deal structure and loan packaging might be the key in this case.  Coupling creativity along with knowledge of credible lenders in today’s market should get this deal done and, at a discount from a full commission sale since the seller is already providing a qualified buyer.

Aron Culver, SVP At Business Team

I firmly believe that you should hire the services of a quality business broker to assist you, even if you work out a deal with your manager. Your broker should have the capability to locate additional lenders or offer alternative solutions. Your broker can also assist in the purchase agreement, escrow, and provide all the steps to ensure a smooth transition. As a seller you can’t afford to lose any more time in hoping your manager receives financing, even if she may be the best fit for the business. You may also find that your manager gets more motivated to seek financing if she knows that you are securing the services of a broker. You also need to tell your manager that by hiring a business broker you may be providing a benefit to her with the additional resources they have available. My last thought is that if you really want to sell the business to her then set up an agreement with a secured note and payout and provide the financing yourself.

Gregg Tobin - President of Pacific Coast Business Broker

Categories: Business Purchase Financing, Buying A Business, Deal And Escrow Issues, How To Buy A Business, Small Business Financing

  Helpful Resources To Assist In Selling And Buying California Businesses
Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Ranvir S. Sandhu, Esq. - Legal Services For Buyers And Sellers

I've worked at top Bay Area law firms and have extensive experience with business entity formation, mergers, dissolutions, conversions, employment matters, including experience in reviewing and negotiating transactional documents such as leases and purchase agreements.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Joe Sandbank, Esq. - Legal Services

I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process.

Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

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