Buying a Business – Finance
Buyers Equity
From small to mid-sized acquisitions the usual spread of equity required from a buyer is between 25-75% of capital. With sellers offering terms of 2-10 years then an analysis must be done to ensure both parties are satisfied and this makes sound financial sense.
Sellers Financing
Most small businesses require the seller to partial finance the acquisition. We achieve this working with the seller using a Seller Note. Seller financing is proven to be faster to arrange as it requires less paperwork than using a third party and the terms are usually more agreeable.
It works in a simple format where the seller offers finance, if the valuation of the business or asset is $3,000,000 the seller offers 40% financing – the buyer puts down the other 60% – $1,800,000 in escrow and will make payments on the remainder of the notes until it is paid in full.
SBA Financing
Small Business Financing offers competitive loan terms and interest rates and in some cases completely eliminates the Seller Note. This means less down payment and debt for the buyer, naturally creating higher net income. This can also be incorporated in with seller financing. The SBA Program is called the 7a Loan Program, this acts as a guarantee or insures the loan in respect of default. Small fees are involved to keep the government program running, but this represent the guidelines that all banks must follow.
Retirement Funds
To avoid a small business loan, retirement funds can play a pivotal role to finance a new business. You would avoid a taxable distribution in the process of buying stock in the company.
Using creative methods we have been involved in 7 figure business transactions that have required only 5 figures in initial cash payment. There are many qualifications for this but if a 401(k) or IRA is used we can avoid penalties during the process.
Advantages of Financing
The buyer is able to acquire a larger/higher earning business. With regards to seller financing, the seller receives tax benefits including tax deductions on the interest of the debt.
On closing the purchase the seller will receive cash, which can be used for negotiating leverage during the process, but does not apply to seller financing.
The business pays off the debt from operating income.
The business pays off the debt from operating income.