Buyer FAQs

There are many ways a business can be financed.

1. Seller Financing. Increasingly, buyers and lenders are looking to the seller for as part of the financing as they try to put a transaction together. In such a scenario, the seller will hold a note at an agreed upon interest rate for a specific term. Seller financing makes the bank more comfortable with the transaction. Lenders know they have a seller who has a vested interest in the success of the business and/or seller can be part of a smart strategy to maximize the sales price and help defer some taxation issues.

2. SBA Loans. In sales of a business, conventional loans usually aren’t available, so a buyer may want to consider going to a Small Business Administration (SBA) lender, which has a number of loan options. The SBA guarantees a portion of the loan.  There are many misconceptions concerning SBA loans. At VRBBNY, we understand the process very well and can assist you with the process.

3. Mezzanine Financing. In mergers and acquisitions, mezzanine financing is another alternative for a buyer looking for capital where the financing package may include higher interest rates. The lenders in this situation are typically high net worth individuals who are expecting a larger return on their investment. They are lending in a junior lien or a position behind the bank and seller financing. The loans are typically made with limited sources of collateral, thus the request for higher interest rates. Again, this financing is often used in funding goodwill or reputation in an acquisition.

4. Funding Scenario. In many transactions, the buyer would be expected to have a 20% down payment. The seller may hold an additional 10% to 20% in seller financing, and the lending institution would offer a combination of conventional or SBA financing to cover the difference, depending on collateral available. Creative financing tactics are becoming more common.

Q. What is due diligence?

Merriam-Webster Dictionary defines due diligence as “research and analysis of a company or organization done in preparation for a business transaction.”  Due diligence is the process of being sure that things are as they appear before a deal is sealed. You want to be sure everything is reviewed and all questions are answered to your satisfaction.

During the due diligence process, an often lengthy list of documents should be provided. The list of documents should cover a range of areas, including:

• Legal structure and incorporation of the company
• IRS records
• Financial records
• Insurance policy information
• Organizational structure
• Personnel policies
• Operations
• Capital and real estate
• Contracts, licenses, agreements and affiliations
• Technology and intellectual property
• Current or potential legal liabilities
• Marketing materials

Q. Will you need the Seller to stay on after the sale?

Seller Training - When selling a business there’s a transition (“training” and/or “consulting”) period. Dependent on the size of the company and the role of the owner the transitions may be as short as a week or as long as a year. In most situations, the buyer wants the seller to remain on board to shorten the learning curve and help with the smooth transfer of key relationships.

In the typical business sale, there is an on-site component to training and then a “telephone consulting period” is added at the end. Also, the seller may additionally be retained as a consultant at a negotiated rate. In some instances, a long-term employment contract is negotiated and the seller maintains daily involvement for a much longer period of time.

For the owner who wants to sell the company and leave quickly, the focus should be on the development of a strong management team. Be sure to introduce key employees/managers to your major customers and vendors and look at ways to delegate responsibilities. The more the customers think they are interacting with “the company” versus the “owner” the easier the transition.

Q. How do I prepare to buy a business?

Ask yourself some important questions. Why do I want to be an owner? What types of activities do I like? What lifestyle is important for me? You’ll also want to be sure to include your family as part of the assessment.

Line up a team of professional advisors. Alert your attorney, accountant and financial advisors that you are looking for a business. Work with a professional business broker.

Consider your financial situation. Be sure to carefully consider how much money you need to live off of and how much money you have for a down payment on a business. Your expectations need to be realistic and something that can be achieved by the type of business you are searching for.  

Develop a personal financial statement. The personal financial statement should show your assets and liabilities and possibly include a supporting statement from your banker or accountant. Be prepared to share this document with the business intermediary who is working with the seller. If you are planning to work with other investors, identify them and create a group financial statement.

Create a profile. Sellers want to be sure their business will continue to be successful. They want to find a buyer who has experience and will take care of the company’s employees. Really, you are selling yourself to the current business owner(s) and the professional team that represents the seller.

Establish your criteria for acquisition. Most buyers have no industry experience in the business that they purchase. Buyers purchase companies based on geography and cash flow. They tell us “I want to stay within so many miles of my house and I have a certain amount as down payment money and I need to make a certain amount each year”. Have an open mind. If you can apply your general business operations, financial and or marketing experience to a business, and the owner is not the main technician in the business, then the industry should not matter.  If you are interested in buying an existing business, you want the business intermediary to be selling you to the seller. It’s important that you demonstrate that you’re a qualified, motivated buyer. Being prepared and serious about your search is an important initial step.

Q. What are the benefits of buying versus starting a business?

So you want to be your own boss. Consider the options: start your own business or buy an existing company.

Certainly there are pros and cons to each option. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered ... the risk-to-reward ratio is tipped in your favor when you purchase an existing business.

Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years. On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit.

There are a number of reasons to consider the purchase of an existing business rather that starting one:

• Proven Concept. Buying an established business is less risky – as a buyer you already know the process or concept works.
• Brand. You’re buying a brand name. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name in the business community, it’s easier to attract new business than with an unproven start up. That’s an intangible benefit that’s difficult to put a price on.
• Relationships. With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build.
• Focus. When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.
• People. In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, develop them and assimilate them into the company culture. With the right team in place, just about anything is possible and you will have an easier time implementing growth strategies. Plus, with trained people in place you will have more liberty to take vacation, spend time with family, or work on other business ventures. When start-up owners and independent contractors go on vacation, the business goes, too.
• Cash flow. Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. Start up owners, on the other hand, often “starve” at first. Some experts say start-ups aren’t expected to make money for the first three years.