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.
About The Author - Peter Siegel is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 866-270-6278.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|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.
|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.
|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.
|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.
|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.
|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.
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