Financing Your Business Purchase

Many people dream of one day owning their own business. But the idea of buying an existing business is often brushed aside due to the perceived notion that the purchase will take more money than they have available. Many are unaware of the financing options that exist, and what would be required of them in terms of down payment in each scenario.

Remember, the following are general guidelines, and all business transactions are open to negotiations and adjustments.

Seller Financing: In many ways, this is the simplest form of financing a business purchase. The buyer pays a cash down-payment to the seller, and the seller, acting like a bank, finances the remainder of the purchase with payments made to the seller over time. The down payment in this case is purely negotiable. I will tell buyers that it can be as much as 50% down, but ultimately it is whatever is agreeable between the buyer and the seller. The remaining amount to be paid to the seller can simply be in the form of a promissory note with equal payments for a set period, or an earn-out, where payments are tied to performance of the business going forward. Either way, this benefits the buyer because the seller has a strong interest in seeing the business succeed under the new ownership. Seller financing is a flexible option, because terms are fully negotiable between buyer and seller. This option can also be the fastest route to a closing.
Bank Financing: In purchasing a small business, you are buying a cash flow stream more than you are buying hard assets. Because of this, business acquisitions are more suited for an SBA 7a business acquisition loan than they are for conventional financing. The SBA 7a is a government insured loan made by a private bank. The program is in place to encourage banks to lend in situations where physical assets might be minimal. A typical structure is 20% down payment from the buyer, 10% carry (seller note) from the seller, with the bank contributing 70% paid to the seller at closing. This is a good way for the buyer to leverage their capital, and for the seller to get as much cash at closing as possible. Certain terms are dictated by the SBA, so there will be less flexibility as to how buyer and seller structure the deal.
Alternative Options: In situations where asset value is close to the purchase price, conventional bank loans and equipment financing can be viable options. In this case, the buyer borrows money from the bank, with the assets as collateral, and the buyer then pays the money to the seller.

Generally speaking, when I meet with a buyer, I tell them to anticipate putting 20-50% of the purchase prices as a down payment. This gives them a realistic parameter to keep in mind as they are searching listing sites looking for their next opportunity.

Good luck in your search!

Takeaways:

There are several options to finance a business purchase.

Each option has advantages and disadvantages.

Generally speaking, when buying a business, you should expect to pay 20 - 50% of the purchase price as a down payment.