How to Finance the Purchase of a Business?
The idea of business ownership is a beautiful thing. It comes with dreams of flexible vacation schedules and contributing to your community, but then it all comes to a screeching halt when you begin to think about how to actually make it happen. Fear not! There a number of ways to purchase a business, one of which is surely to suit your financial situation and business goals. The main options for purchasing a business are cash (cash is king!), bank financing, seller financing and investors. So let’s get started discussing these options in more detail, starting with cash.
Cash. You can easily take money out of your savings to finance a purchase. But you can also withdraw money from your 401K, of course keeping in mind there is an early withdrawal penalty and there will be some tax consequences. So the self-directed 401K method may actually be a better option. In this method, the buyer establishes a C-corporation and uses their 401K to purchase stock in their business. This method avoids the tax implications mentioned above, but is generally only used with amounts greater than $50,000. Finally, you can use a Home Equity Line of Credit (HELOC) for the purchase, but you will want to have more than 80% equity in your home first.
Bank Financing. Moving to the banking world, there are conventional loan options, which are fairly rare, but there is also the SBA loan. An SBA loan will be guaranteed by the Small Business Administration. We always suggest working with an SBA preferred lender as they are pre-approved by the SBA and have more decision making capabilities. This option will require at least a 10% down payment. The SBA recently made some changes to their loan program, starting in 2018, which you can read up on here!
Seller Financing. Seller financing is such a great option for purchasing a business, one that we work with more often than not! This option is similar to a bank loan, however, it is coming from the seller. Generally, a 50% or more down payment is required, however this is negotiable between the buyer and seller. The interest rate is usually around 5% - 8% and the term depends on the size of the loan. Smaller loans will have shorter payment terms, while larger loans will have longer term periods. The main concern with this option is to ensure the terms are set while keeping the ability to maintain cash flow in mind. Seller financing is a fantastic option as it allows for the seller to have a continued vested interest in the business.
Investors. This option requires a private agreement between the buyer and their investors, which can even be family and friends. It is important to set the terms of this agreement up as early as possible. Ideally before the business search process has begun.
For more information on how you can finance the purchase of your business, please visit our website or schedule a free consultation with one of our experienced brokers today!
Rachael Holstein joined the Transworld Team in 2016 as Marketing Coordinator. Her working experience has been largely focused on Business Development and Marketing in the finance, architecture, property management, and information technology industries. A long time resident of Cleveland, Ohio, she attained her Undergrad from John Carroll University and a Master’s Degree in Global Interactions from Cleveland State University. She relocated to Denver in 2013 for a change of scenery and a bit of adventure.