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 they 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 lightŁ 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 (SBA loans, Commercial Financing, Retirement Plan Conversions, Hard Money loans, etc) and business purchase financing pre-qualifications. For more information on business acquisition financing and the BizBen ProBuy Program phone Peter Siegel direct at 925-785-3118.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Helen Yoo: Escrow & Bulk Sale Services - Southern California
New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
|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.
|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.
|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.
|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.
|Related Articles, Events, Blog Posts, Discussions, Videos, Interviews|
|The Bottomline: What Exactly Is Adjusted Net Income, SDC, And Cash Flow?
The use of add backs & adjusted net income is common among sellers of businesses when showing their financial information/performance. But buyers are cautioned to review financials and tax returns / documents closely. Peter Siegel, MBA with BizBen (ProBuy & ProSell, Financing Expert) explains.
|Thinking Of Selling My Business: What Factors Create Value And Drive Price?
There are a lot of misconceptions about what enhances the value of a business. The following factors in this Discussion Post on BizBen are aspects of a business that really drives its value and pricing. Business owners thinking of selling should check these out these factors before selling.
|Selling My Small Business: What Items Should I Have Ready To Be Successful?
When selling a small to mid-sized business, owners should have their paperwork and financial information ready to go! They should also have a short business plan of past history, current operations, and potential for the future. In this BizBen Discussion several advisors and intermediaries weigh in.
|What Should I Do If Other Buyers Are Trying To Buy The Same Business As Me?
Buying a small business is hard enough when there is no competition, so how might a buyer navigate the process when there is additional competition from other buyers? Potential small business buyers are offered a few key ways that a buyer can beat out other potential business buyers in this article.
|Find Out Why 80% Of California Business Buyers Never Find And Buy A Business
First the dreaded statistic: 80% of all California business buyers looking to buy a small to mid-sized business in California never end up doing so! Peter Siegel, MBA BizBen Founder And Director at 925-785-3118 covers successful tactics all business buyers of small businesses should utilize.
|How Do I Navigate Through The Negotiation Process When Buying A Business?
Negotiating the terms of a business deal is a delicate process, where one wrong move can cost you the business that you wanted to purchase. Peter Siegel, MBA (BizBen ProBuy Program) discusses the ins and outs of negotiations, and how to work well with the seller to get a deal done.
|Uncover Hidden Problems In Due Diligence When You Buy A Small Business
Most everyone who's decided to buy a small business in California knows the importance of due diligence. That involves close examination of a business prior to removing contingencies. But not everyone knows how to uncover problems that are not obvious. Here are five of the most common hidden issues.
|Buy A Business Or Start From Scratch? 5 Key Differences For Business Buyers
Some buyers believe it's better to start a business from scratch rather than buy an existing enterprise. While this may be good advice in some cases, usually it's not the best strategy. Here are five tips to help a buyer make the right decision from from Peter Siegel, MBA (BizBen Director).
|See All News, Tips And Events|