Finance Options for Buying a Business
Buyers may have the cash to buy the business. Or they may use equity in their residence or other real estate to raise the money. Some buyers may have other assets that they can sell or borrow against.
Banks lend against a buyer’s assets as in the description above. They also lend against the assets of the business being purchased, as long as there is sufficient value to support the loan. The bank will also need to be comfortable with the viability, profitability and future of the business regardless of the asset value.
Venture Capital Firms:
These firms generally only loan to very large businesses with tremendous growth potential and they usually receive an equity position in the company.
Many if not most small to medium size business purchases are financed by an SBA loan. The loan is actually obtained from a bank and is backed by the SBA which reduces the banks potential liability. The SBA is the United States Small Business Administration that has been in existence since the 1950’s. The 7a SBA program allows customers to obtain financing for a variety of reasons which includes business acquisition financing. This financing allows banks to offer more favorable terms than are normally available. In fact, most banks offer terms of up to 10 years with no balloon payment and no prepayment penalties on business acquisitions. Business acquisitions that include commercial real estate can be financed for longer terms.
Some banks are preferred SBA lenders. The preferred lenders generally have the upper-hand in acceptance, service and terms. It is usually to the buyers advantage to work with one of these lenders.
Many small businesses sell with, or because of seller financing. In some cases a small amount and in other cases a large percentage of the sale price. Sellers like to get all cash at closing however Buyers have more confidence in the decision to purchase a business when the seller is willing to assist in the financing. Seller financing provides the buyer with added confidence that the seller believes the business will service the debt and provide a living wage for the buyer.