This guide is provided by BusinessesForSale.com – a leading global website for the buying and selling of small and medium-sized businesses.
Buying a business can be an extremely expensive process and the way that it is financed can have a significant impact on the business success going forward. Quite often, financing options such as loans, business angels or venture capital can have high costs or unfavourable terms attached. The interest charged on a loan, for example, could be a major cost to your business.
It is therefore worthwhile investigating two alternative methods: personal equity and seller-financing.
If you've chosen to buy a business then you're already prepared to make a financial commitment. Exactly how much you're able to invest is a personal matter, but in general you should be putting up a minimum of 20% of the asking price.
By demonstrating that you've got the confidence to invest in your own venture, you will be sending out a positive message to potential financiers.
There are several ways you can raise the necessary equity:
- If buying a business is a carefully thought-out strategy then you may have already set up an investment account. Small but regular contributions are easier to fund but won't satisfy an urge to BUY NOW
- Your family and friends are probably the most supportive people you know. Don't feel ashamed to approach them and explain your situation. They can always say no. Perhaps you could draw up an information leaflet that will assure Uncle Vernon of your good intentions
- Home equity mortgages, otherwise known as second mortgages, are a frequent source of funds for small business buyers. The interest rates vary but they are usually lower than other commercial lending rates
This is a simple and effective way to finance the deal, without having to enlist the (more expensive) services of a third party. It works particularly well once the seller has chosen you as their preferred buyer. They want to sell to you as soon as possible, you want to buy from them. But you don't have the capital yet and they do.
Although it seems a strange concept, it is often in the seller's favour to help finance the sale:
- Sometimes the seller is almost obliged to offer financial assistance in order to stop the deal from falling through
- Many sellers actually prefer to take this role, perhaps providing up to 50% of the selling price
- In the buyer's favour is the fact that interest rates offered in seller-financing are usually lower than a bank's rate and with a far longer amortisation
- Make sure that detailed terms are drawn up and agreed, including tax implications
This method is highly respectable, can be beneficial for both parties and is even insisted upon sometimes by outside lenders before they will agree to participate.