Read the program outline now!
 


Back to Article Index Page 

Financing The Deal

By: Richard Parker: President of The Business For Sale Buyer Resource Center and author of How To Buy A Good AUSTRALIAN Business At A Great Price©

If you’re thinking about buying a business, you’ll be pleased to learn that financing the purchase is generally quite easy. In fact, it’s far simpler to get the money you need to buy an existing business than it is for a start up. Most people simply don’t realize how to do it. Don’t get the wrong idea: you’re not going to buy a business, at least a good one, with no money down; that only happens in the infomercials.

Many prospective business buyers mistakenly believe that traditional lenders will welcome them with open arms when they present them with a business they’re looking to acquire. Unfortunately, nothing can be farther from the truth. It still amazes me how the banks have got most people fooled. They run these great ad campaigns promoting themselves as “business/client friendly” but try to get them to lend you money to buy a business. It won’t happen.

It doesn’t matter how experienced you are, or what your relationship is with them,. Unless you’re prepared to collateralize the loan 100% with non-business and personal liquid assets, they aren’t going to give you a penny. So don’t waste your time seeing them. With the terms they offer, it’s just not worth it.

The landscape is pretty lopsided when it comes to how people buy small businesses. 90% of all transactions involve some financing. Only 10% are all cash deals. Even if you’re inclined to pay all cash, my advice is not to do so, unless you get a very hefty price reduction: at least 20%.

Seller Financing

The vast majority of small business acquisitions involve seller financing. In fact, it’s estimated that over eighty percent include some for of financial aid from the former owner. While the percentages vary, it’s generally thirty to fifty percent of the total purchase price. When you think about the situation, it makes perfect sense. First of all, by providing financing, the seller validates the viability of the business itself. Also, the seller is able to get the highest price possible by funding part of the acquisition.

From a buyer’s perspective, it serves to reinforce that the seller is also at risk in the transaction. It’s a perfect mechanism to help ensure that what you’ve been told by the seller is true and accurate. It also serves as a mechanism to deal with situations that may arise later on that come about as a result of their actions where you may need the ability to offset their financing.

  • While the terms vary for seller financing, you can expect to pay about 6-8% over four to five years. Plus, you have the ability to get far more creative with seller financing than any other:
  • Negotiate a holiday from any payments for three-six months after closing
  • Allow for the first year to be all principal
  • Have the right to make lump sum payments several times a year towards the principal
  • No prepayment penalty
  • You can arrange for lower payments throughout the loan with a balloon payment down the road
  • While you will have to sign personally, you will not have to personally collateralize the loan. The seller’s lien is against the assets of the business.

Bank Financing

Most small business friendly banks in Australia will be open to your proposal. However, you must keep in mind that they may not necessarily want to secure a loan with the business' assets and will instead, want personal security. This is a tough decision that you must make.

The good part is that they may be willing to lend you a greater share of the total deal and so you'll be able to leverage your cash down payment much farther.

So What’s Your Best Bet?

Unless you’re buying a business for under $100,000 or getting an enormous price concession, don’t pay cash. As for banl loans, while their rigid guidelines will help to confirm the viability of a business, unless you’re making an acquisition where you cannot finance the down payment, I tend to place this as my second choice.

I am a huge believer in seller financing. It’s like buying a used car with an extended warranty paid for by the prior owner. There’s no substitute for the flexibility you can achieve, or the favorable terms, plus, more than anything else, it really forces the seller to share in the risk. If I’m going to buy someone else’s business, I want to be darn sure that they’ve got a stake (or risk) in my success as well.

This article represents a fraction of what you’ll learn on this topic in How To Buy A Good AUSTRALIAN Business At A Great Price© - the most widely used reference resource and strategy guide for anyone thinking about buying a business. Read a detailed listing of what you'll learn .

Back to Article Index Page 

Copyright 2001 - 2017, Diomo Corporation. All Rights Reserved.

Home | About Us | Complete Course Outline | Success Stories
Articles | Program FAQs | Contact Us | Our Guarantee | Blog | Order HERE | Privacy Policy