Financing your business acquisition

I've met with several business owners over the last week who have expressed the same concern - how will a buyer finance my business acquisition?

Over the last two years, a number of buyers were utilizing home equity loans or lines of credit to purchase smaller businesses. Unfortunately, this opportunity has dried up in the current marketplace. In addition, in this economy, it has been more difficult to receive a conventional bank loan.

Our firm has a few new agents (business brokers) and we are in a training mode. Recently, after sitting with a local commercial banker and one of our new agents and discussing financing challenges, I sat down and created a simple chart for our team's use on business financing. I explained that as business brokers we need to be as creative as possible. "Financing" a business may include one of the options below or a combination of a few. The best option is the one which fulfulls the Seller's needs with the Buyer's wants.

CASH - Typically Sellers desire all cash. However, during our initial meeting with a Seller we discuss the tax consequences and the possible advantages to other options. We also discuss the challenges faced by Buyers in pulling their cash out of homes, 401K's etc without tax consequences.

SELLER CARRYBACK - This option typically requires a buyer to put 50-60% down with the Seller acting as the lender for a 3-5 year period with an interest rate of 8-12%. Sellers are always concerned with the risk and there is risk in this option. However, a buyer can sign a personal guarantee, a lien can be placed on the assets of the business and perhaps additional collaterol can be provided. With a seller carryback, we may be able to get a Seller closer to their asking price. The Seller will financially qualify the Buyer and will review their personal financial statements and credit scores.

HOME EQUITY LOAN or LINE OF CREDIT - This was a great options a few years ago due to the tax writeoff on the interest and the length and rate of the loan. However with the current housing market, Buyers are having difficulty acquiring this option.

CONVENTIONAL LOANS - Banks generally require 10-30% down. The loan term can range from 20-30 years. Depending on the size of the business, lending decisions may be able to made locally. Generally for real estate transactions only.

SBA LOANS - The Small Business Adminstration provides an opportunity to a new entrepreneur. They will lend on non real estate transactions however it is important to have 3-4 years of experience in the field. In addition, a thorough business plan is required and completion of a very detailed application. The term can range from 20-30 years and the rates are a bit higher due to the risk.

HARD MONEY LENDING - This option is generally for those who don't have a lot of options. These funds are short term and with high rates. For those with bad credit, bankruptcies or very risky ventures.

VENTURE CAPITAL - We receive requests to find venture capital for firms. Typically venture capital is available to technology related companies only. Venture capital firms take a portion of the equity of your firm and require high rates of return.

BORROW FROM 401K - This is a complex process and requires a professional to assist the buyer. This typically involves forming a C corporation to lessen the tax consequence and rolling the 401K into the new company for the purpose of acquiring the business and working capital.

EMPLOYEE STOCK OWNERSHIP PLAN - This option also requires a professional's assistance. This allows the business owner to sell the business to his/her employees via an ESOP. A new owner can also participate in an ESOP for acquision purposes.

I recently listed a large business with real estate in the Tucson area. The current owner was still making payments to the previous owner and had provided a lien on the real estate. We talked at length about Buyer options for financing and will be working with the previous owner on assuming the Seller carryback loan. This assumption with 50% down should be sufficient in paying off my Seller in full. Assuming existing debt is another great angle to consider.

As you can see, there are many options to consider. As business brokers, it is our job to sit down with you, assess your needs and be as creative as possible!