Looking to Buy a Business and Need Financing? This Post is For You!
If you are looking at businesses for sale near you or how to finance a business acquisition using an acquisition loan, then this is for you. Don’t worry! Even if you don’t have millions of dollars in the bank there is still a solution to help you buy your first business. Let’s jump in.
Most people think that the only way to finance a big business acquisition is to go to their local bank and take out a loan for the total purchase price, borrow, the money, and buy the business.
Well...it is rarely ever that easy…
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While you may be able to obtain a bank loan for a business acquisition there are a number of other more creative ways to finance your business acquisition, other than a typical bank loan.
#1: Seller Note
Many business owners who are looking for a business buyer will be open to financing a portion or even 100% of the agreed-upon purchase price of the business themselves.
While there are a number of ways to structure such a deal, the most common method is to have the business seller effectively grant the buyer a loan (otherwise known as a seller note or take-back financing) where the buyer effectively pays the seller back in monthly payments similar to a bank loan.
In this case, the buyer and the seller will execute an actual note or loan agreement between the two parties that define the payments and the terms in a similar fashion to a bank loan.
The business acquisition seller note financing will have terms such as a number of payments interest rate, default provisions and many other terms that will protect both the buyer and the seller throughout the duration of the note.
It is very common for a seller to finance 20-50%, and even as high as 100% of the purchase price using this method (in fact…our CFOs have negotiated such deals in the past).
#2 Seller Financing Through Commissions or Performance
If the seller leaves the business in a short period after the transaction tease plays another common method for seller financing is to have the buyer of the business pay the former owner or current seller effectively a commission on the agreed-upon purchase price based on a percentage of revenue profits or cash flow over time.
This is different than a seller note where the buyer agrees to pay the seller of the business a certain number of payments over time and actually treats the financing as a loan.
Financing through commissions or performance is more desirable for buyers and less desirable for sellers since there is no formal obligation to pay a fixed dollar amount over time like a seller note.
However, if it’s structured properly both parties can win and settle the debts for the purchase price more quickly especially if the buyer is able to increase sales and cash flow or quickly and the current owner could ever do
This is common and professional services businesses and other underperforming businesses where the current owner is neglecting or failing to operate the business as efficiently and profitably as another business owner or the new buyer could.
In the end, you pay off the agreed-upon purchase price over time on a flexible basis that helps you buy more of the business equity over time and pay back the owner for their hard work.
# 3 Private Investors
The third way to finance a business acquisition used to use private investors to contribute equity or debt into the deal.
Particularly if you are unable to obtain traditional bank financing to buy the business there’s always the offer to bring in outside investors to find a portion of the deal using equity or debt instruments.
Many entrepreneurs have left investment banking consulting big private equity shops to form small funds using their own and some private investors’ capital to identify and execute the acquisition.
In fact, the appetite for business acquisition is increasing exponentially amongst private investors since the current stock markets in venture capital markets around all-time high valuation and small businesses as a whole are thriving more than ever.
So if you happen to have a network of wealthy individuals who can support you and your business acquisition by funding you with equity this can be a clear path to buying your first business using OPM.
#4: Traditional Bank Loans
We always recommend entrepreneurs building relationships with local bankers as possible so that they can have loans and credit products available to them when they go to launch or acquire their next business.
And while every bank has a different appetite for business acquisitions and different specialties it is widely accepted that a well-researched business acquisition in a strong in a growing industry has a great chance of being funded by a traditional bank.
Common banking products used to execute a business acquisition include a business line of credit, a personal line of credit, a home equity line of credit, commercial term loans, equipment financing, and SBA loans to name a few.
One of the most popular and favorable options is many times the SBA loan. SBA loans offer up to 10-year loan terms for business acquisition and working capital loans and are a great option to buy a business.
If you were on sure how to approach your banker to discuss business acquisition financing recommend starting with your local business banker today.
#5: 401K ROBS
One of the least understood and least utilized start-up acquisition financing vehicles available to people today is the 401(k) ROBS financing option.
Over 30 years ago the IRS created the option for entrepreneurs to take existing funds in their retirement accounts with their prior employers and allow them to roll those funds into their newly formed companies to invest in startups real estate and business acquisitions, including their own businesses.
Our partners at Guidant Financial have a thorough 401(k) ROBS conversion service that allows entrepreneurs to find their business ventures using money that they currently have invested in stocks bonds and ETFs with their employers.
Disclaimer: We recommend you speak with your financial advisor and CPA before initiating any retirement account changes.
However, if you consider that you’ve been investing your retirement funds into stocks bonds and funds of companies that you have never met and had zero control over it may make sense for you to finally be able to invest your hard-earned savings into your own business venture especially if you know what you’re doing and you are confident that you will be successful.
Summary
We hope this article has been informative and educational for you understanding how to finance your next business acquisition.
If you were driven and you have identified a great business acquisition opportunity in an industry that you understand no well and can succeed in then you should be able to craft a business acquisition offer that suits the goals of the current seller and you and your family.
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Start forming relationships with bankers private investors attorneys and accountants to identify your next big business acquisition opportunity and make sure that you have your financing options prepared so that you can add quickly and executed deal when the right opportunity arises.
Good luck and be well!
Chad Pavel, CPA