financing business sale

By Richard Parker | Diomo Corporation | Visit Website | About Author

How wonderful it would be to purchase good businesses for no money down. Unfortunately, that rarely happens. And so, the issue becomes how can small business buyers finance a purchase?

The main misconception we need to address immediately are banks. Sorry folks, they are not waiting for you to walk in to the branch so they can hand over bags of money for you to buy your dream business.

Next, while there are government programs available and specifically ones offered via the SBA, those loans are difficult to obtain. The SBA itself does not lend money; it underwrites loans banks make under this program. Both the buyer and the business must qualify and buyers need to demonstrate they are capable of running the business. While the equity investment from the buyer and participation from the seller may be attractive, these loans also come with significant upfront fees (but no worries, those can be financed over ten years which adds even more cost to the deal).

So if banks and the government aren’t handing out money, how can you finance the purchase? The good news is that the decades old strategy of seller financed deals is still the norm. It always has been and it always will be. Any seller, broker, lawyer, banker, accountant or anyone else who tells you otherwise is simply wrong.

In order to get deals done, sellers have to extend financing to a buyer. Further, unless a buyer is getting a huge discount, they simply should not do an all-cash deal even if they can afford it. The biggest reason of course is there is no better mechanism for a seller to back up what they have represented about the business than by having “skin in the game”.

Terms-wise, seller notes are generally at competitive interest rates, a few points above prime and should be anywhere from 3-7 years. You may be able to negotiate more, or pay interest only, have a balloon payment down the road, or other favorable terms. These are all very attractive to a buyer and certainly afford you flexibility you cannot achieve with traditional lenders. As well, if the business runs into any trouble, rest assured it will be much easier to get temporary relief from the seller versus a bank.

A word of caution: you may encounter brokers or sellers who tell you they will not offer financing. Some may not that is true; those are also the ones most likely remain on the market forever. The fact is that most small business sales are seller financed. To get deals done, sellers have to participate in the financing. Be prepared to walk from potential deals that are not willing to consider extending financing to you.

ABOUT THE AUTHOR

Richard Parker is the author of the How To Buy A Good Business At A Great Price© series – the most widely used reference resource and strategy guide for buying a business. He has personally purchased thirteen businesses and his company Diomo Corporation – The Business Buyer Resource Center™, provides consulting and brokerage services to business buyers and sellers in more than 80 countries.