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Ways To Finance A Business Acquisition

· articles,finance and money,planning

Structuring A Transaction

There are many ways to structure the sale of a business that makes sense for both buyer and seller. Creative financing is an area where ACME Business Brokers can help. We can recommend a variety of payment options that are available which, in many cases, can mean the difference between a successful transaction and one that is not. Developing a solid understanding of how business purchases are funded is essential for both business buyers and sellers. We encourage all business buyers and sellers to familiarize themselves with the most common forms of financing used for business transactions. The following paragraphs can help you get started with your research, however be sure to speak with your Acme Business Broker to obtain more details about the current market conditions.

Bank Financing

Conventional Loan vs. SBA
Getting a conventional loan (e.g., a term loan) from a commercial bank to finance the acquisition of a company can be very difficult. Generally, banks lend funds against existing assets and not against business plans. Thus, to get a loan, the Buyer must have substantial assets, good personal credit, and a solid track record in the industry or someone from the existing company that is going to stay on and can vouch for industry experience. For most conventional borrowers, the better route is to get a bank loan guaranteed by the Small Business Administration (SBA), as covered in the next point.

SBA itself does not lend to businesses. Instead, it sets the guidelines for loans and guarantees that these loans will be repaid. The loans are then made by its partners – including banks, community development organizations, and micro lending institutions. So, when you get an SBA loan, you’re actually applying for a commercial loan structured according to SBA requirements with an SBA guaranty.

Because of the SBA guaranty, lenders are willing to offer the loans at a reduced interest rate. Instead of the typical business loan interest rate, which can be as high as 15% or more, the interest rate for an SBA loan can be as low as 4.5% and never gets higher than 7%, as long as prime rate stays at current rate of 4.00%. In addition, the loan can be taken out for as long as 25 years. Plus, applicants only need to show $17,000 of taxable income (after a livable wage is taken out) to qualify for a 10-year, $100,000 loan.

Seller Financing

Seller financing, aka seller carryback, is a loan the seller of a business gives to the new buyer to cover all, or a portion, of the total purchase price. Seller financing for business carries strong benefits for both buyers and sellers. The amount and terms of seller financing agreements vary significantly depending on the nature of the business being sold, the general availability of third party financing, the buyers cash down payment and various other factors. The willingness of a seller to provide some financing is also an important psychological factor for some buyers in that it can be interpreted by buyers as a demonstration of the seller's confidence in the future prospects of the business being sold.

While the interest rate on seller held notes varies, we usually see rates of 6% to 10%, depending upon prevailing interest rates, and the expected repayment period. Unlike repayment plans set up by traditional lenders like banks, owner financing deals are typically 5-10-year deals, as it’s not in the interest of the seller to wait 30 years to sell their business.

Earn-Out

In larger business transactions, sellers may provide some form of non-contingent financing, but it is less common. That said, larger transactions often include an earn-out provision which effectively makes a portion of the business sales/purchase price contingent upon on the future performance of the business. Earn-out provisions are popular with buyers in that they help mitigate the business buyer's downside risk. They are especially common when there is a significant fluctuation in the business' historical financial performance and/or historical to projected financial performance.

Retirement Fund Financing

IRA and 401K
Although not obvious to many, even knowledgeable observers, pension, profit sharing, 401(k), 403(b), other retirement plan and rollover IRA money may be used to fund your investment. This can be done without distributions, taxes, penalties, or the use of loans. It’s sort of a self-venture-capitalization, since the person is buying shares of his or her own business. The money may be used for franchises, property, equipment or working capital.
 

Other Forms of Financing
Home Equity Loan - This is a quick way to finance the down payment or purchase price. It also is usually the lowest interest rate for the buyer.
Credit Cards - There are many businesses that got started, or financed, on a credit card.
Friends and Family - If these people are going to finance the purchase, we do require that they verify this directly with us.

Again, we encourage you to work with your ACME Business Broker to assist you in identifying and evaluating the best financing options for your business purchase.

Guest Post by Heather South
Heather South is a seasoned Business Broker that helps bring Buyers and Sellers together. Since 2003, Heather brings her calculated approach, innovative ideas, and integrity with results-oriented actions to every deal. As a native of Nashville, TN, Heather has recently moved to Pensacola, Florida and works with qualified prospects across the United States. Whether you are interested in buying a business or selling, let Heather be your trusted intermediary for ethical and professional services. Heather's reputation, longevity in the industry and history of successful acquisitions speak for itself.

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