Financing the Business Acquisition
The epidemic of corporate downsizing has made business ownership a more attractive proposition than ever before. As increasing numbers of prospective buyers embark on the process of becoming independent business owners, many voice a common concern: How do I finance the acquisition?
Buyer’s Personal Equity
In most small and mid-sized business acquisitions this is a key element. Anywhere from 20% to 50% of the capital needed to purchase a business comes from the buyer.
One of the simplest and best ways to finance the acquisition is to work closely with the seller and negotiate a seller note. The terms offered by sellers are usually more flexible and more agreeable to the buyer than those from a third party.
SBA financing offers buyers attractive loan terms and interest rates while eliminating, or reducing, the need for the seller to carry a note. This means a lower down payment and lower debt service for the buyer, which translates into more net income for the buyer. Both of these factors make SBA financing attractive.
Financing the Purchase of a Business: The deal has to make dollars and sense
The most important factor a buyer must consider in the purchase of a business is cash flow. Financing substantially increases a buyer’s cash flow while lowering their up front investment. Thus, financing is a critical factor in a successful transaction.
You can double or even triple the net earnings after debt service by using debt (financing) to leverage your investment with the same amount of cash down payment invested in an all cash transaction.
Advantages of financing the purchase of a business:
- You can buy a bigger business with higher earnings with the same amount of cash.
- Seller gets cash at closing from your down payment + portion from financing.
- Tax benefit to the seller for installment sale (note) part of the transaction.
- Business pays off the debt from operating income.
- Interest on the debt is tax deductible.
In most private business purchases for less than $1 million in value the seller provides some form of financing. This has several advantages:
Bank – high interest rate.
Seller – negotiable interest rate.
Bank – Lower down payment.
Seller – Higher down payment (unless combined with bank financing).
Bank – Difficult and time consuming credit checks.
Seller – Simple credit checks.
Bank – Long approval process.
Seller – Short and simple approval process.
Bank – Your home and personal assets are collateral for the loan.
Seller – Business is collateral for the loan (note).
Bank – No seller commitment to the future success of the business.
Seller – Greater seller commitment to your success.
Bank – Narrow pool of money resources.
Seller – Seller is resource.