Financing Options

A buyer can utilize several sources for obtaining a down payment for a business acquisition.

·         Savings Accounts

·         Cash Gifts from Family Members

·         Home Equity (see below)

·         Partial Seller Financing (see below)

·         ERSOP’s Using IRA’s and 401K plans (see below)

It is important to plan ahead and have your down payment liquid and ready for the purchase of your business.  Through leveraging and the right structure you will be able to obtain a business that will meet your desired goals.  Our Team will work with you to maximize the value you derive from the purchase of a business.

II.        Seller Financing

There are many circumstances that seller financing might be the right choice for a Buyer and Seller.

• Seller financing greatly increases the chances that a transaction will be successful.
• Seller financing offers reduced paperwork.
• Seller financing offers reduced approval times.
• Seller financing terms can be structured to fit the transaction.
• Sellers can structure the note and receive significant tax savings.

A Seller will typically carry back a note from 10% - 50%.  When a Seller offers financing to a buyer, the buyer can feel good about the Seller's confidence in them and the viability of the business to service the debt.  Sellers will require a personal guarantee from the Buyer and retain a security interest in all of the business assets transferred.  One drawback to Seller financing is that Sellers will typically require a much higher down payment and a shorter repayment time than most lenders. However; Seller financing can be combined with other types of financing.  When this occurs, seller notes are usually subordinated or secondary to the other financing which makes many Sellers reluctant to finance a large portion of the purchase.  There are a variety of ways to structure a seller financed deal that makes since for both buyer and seller.  Deal structuring and financing is an area where your VR Professional Business Intermediary can be of service.

III.           SBA Guaranteed Loan

SBA(Small Business Administration) Loans for the purchase of a business are based on the cash flow of the business as reflected on the tax returns for the last 3 years.  The sales transaction plus the loan must meet minimum financial ratios established by the SBA.  Owner’s salary is added back as well as some other allowed expenses.  Depreciation, Amortization and Interest are also added back to determine how much the SBA will finance the business for.

SBA financing benefits:

• Qualification based on business assets and cash flow
• Lower Down payment for Buyer, Smaller Note for Seller.
• Typical Loan terms for the Buyer 10 years.

Many local, regional, and national lenders offer business acquisition loans that are guaranteed by the Small Business Administration (SBA).  The SBA can now guarantee up to 90% of the loan value.  If you are considering SBA financing, you should always look for a lender with SBA preferred status.  A preferred lender is responsible for their own underwriting and handles the loan processing in house before submitting the loan package for SBA approval.  These lenders have more control over the process and a higher likelihood of loan approval.    

SBA loans require many different fees including packaging fees, loan guarantee fees, appraisal fees and others.  These fees can add up to 2-4% of the loan's value; often these costs can be added back to the loan amount.  Current legislation through the stimulus package has allowed banks to waive or discount these fees. 

Depending on the structure of the transaction, down payments on SBA loans are between 10-30% of the transaction value.  Most transactions however, fall into the 20-30% down payment range.  SBA loans require personal guarantees, security interests in the business assets, and most SBA lenders will require real property collateral in addition to the business assets collateral.

IV.        Home Equity Loan

Business Buyers have also used the Equity in their home to buy a business or assist with the down payment.  The term for a Home Equity Loan is typically longer than a SBA Loan, and the fees are typically less.  Buyers will sometimes opt to finance the entire purchase of the business with their home equity loan or ask the Seller to carry a note.  Buyers feel more confident in Sellers who are willing to carry part of the financing and Sellers are more willing to provide some financing for the business when the Seller’s note is in first position.  The Sellers will still usually require the personal guarantee of the buyers and an interest in the business assets.

V.        ERSOP Plan

Using Retirement Funds for Business Acquisition and Capital

Money in IRAs and 401(k) plans can be used to finance the purchase of a business.

An ERSOP Plan provides a simple process to invest retirement funds in a new or established business without distributions, penalties and taxes. Anyone with a qualifying retirement plan has a ready source of capital for financing their business.

Instead of investing in the stock of other businesses you will be investing in the stock of your own business.

Capital for the investment in your own business can be obtained from the following types of retirement savings plan: