When a California business buyer starts to buy a business for sale, he or she is likely to discover that financing will be needed to complete the deal.
Added to the funds the buyer has saved for a business purchase, plus the money a seller might be willing to carry back in a note, 3rd party financing may be required for the down payment, working capital, and perhaps to contribute to the agreed-on sum to be put into an escrow service to start due diligence.
Four strategies for raising that extra money have helped many buyers successfully close on their transactions.
1. Non-SBA Lending Institutions: A bank, savings and loan, credit union, or finance company is usually the first stop for the buyer seeking a loan to buy a business for sale. One good candidate will be a local business bank that may be willing to help finance the transaction if the buyer will then use that institution to handle the business banking account, the merchant credit card service and other departments that can satisfy its banking needs. There are also specialized programs for business purchase financing that buyers can tap into, however an introduction from a specialty financial advisor certainly helps.
2. SBA Loan Program: Financial institutions in the SBA lender network offering the 7 (a) and other SBA loans programs may be the right choice if the buyer/borrower is short on assets to use as collateral, but long on experience with the type of business being purchased. The lenders who make this kind of loan are sure of repayment because the Federal agency will guarantee most of the loan amount in the event a borrower defaults. So the emphasis here is on repayment ability rather than value of assets used to secure the obligation. The buyer/borrower applying for an SBA loan program, should be prepared to provide a great deal of information about work history and about the financial performance of the company being purchased. Members of its network need to follow the SBA's strict lending guidelines so the loan originator is satisfied that the business will generate enough revenue to cover the loan payments, and that the buyer/borrow has the experience needed to successfully run the business.
3. Private Lenders: Some business buyers seek money from individuals or groups that lend money for business purchases, but are subject to far less government regulation than are financial institutions. The downside of this is that they probably will charge higher interest rates than financial institutions and require collateral with value that meets or exceeds the loan amount. Be prepared to offer a second deed of trust in your home as security, and to receive a foreclosure notice if you fall behind in payments. The benefits are quick turnaround from application to funding, and the possibility of getting funding for a deal that doesn't fit the guidelines followed by conventional or SBA-backed or Non-SBA financing firms.
4. Using a Retirement Account: Although many people think they can't touch their 401k or other retirement accounts without penalty until nearly 60 years of age, IRS rules do permit tax payers to roll over funds from their retirement accounts into corporations set up for the purpose of buying a business. This is not a DIY (do it yourself) project, however. The buyer/borrower contemplating using retirement savings for a down payment on a business purchase should consult with a tax lawyer or accountant to make sure to follow the strict rules by which money from a retirement fund can be accessed, without penalty, for the purpose of buying a business.
These are four of the key methods for a business buyer to access the extra money that may be needed to complete a deal and still have cash in the bank to fund working capital for the newly acquired business.
About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan placement/brokerage services with SBA and Non-SBA Loans, Retirement Plan Conversions, Hard Money, Note Restructures, etc. Reach him direct at 925-785-3118 to discuss business purchase financing strategies regarding buying (or financing a puchase of) small to mid-sized businesses, franchises, or opportunities, sign up for his weekly FREE webinars and podcasts for business buyers and to get a copy of his latest eBook "Buying A California Small Business Successfully."
|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.
|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.
|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.
|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.
|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.
|Matt Sadati, Business Broker, SF Bay Area, Northern CA
I have Engineering and Law, JD degree, with over 30 years of experience in all phases of entrepreneurship. During the past 15 years my concentration has been in business of mergers and consulting. I have owned and operated over 33 businesses each having one to 30 branches.
|Jeff Back, Broker: Restaurant Specialist - SF Bay Area
J. Back & Associates Restaurant Real Estate was founded in 1988 as the first bay area real estate company to specialize exclusively in restaurant real estate. I am the past President of Charley Browns restaurants and have been involved in the restaurant business for over 35 years. 925-736-8200.
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