As a buyer, you might be nervous that you will be required to pay the entirety of a business's purchase price up front. No matter the business, the purchase price is likely going to be a large sum of money that would make anyone woozy thinking about paying it in full on the spot. However, there are actually several ways to purchase a business and no they do not require the buyer to pay the entire amount up front.
The most common practice for small business sales financing is what we call "Seller Carry." This is where the seller completes the financing for the buyer. Almost 90% of small business transactions and close to 50% of medium business transactions include some form of seller carry. At Transworld, we prefer to structure our deals with 40% down and 60% seller carry. For example, if you are buying a business for $200,000 the total amount required at the time of sale would be $80,000. The remaining $120,000 would be financed for a period of 3, 5 or 7 years at an interest rate of 5% to 7%.
Being able to pay the purchase price over a few years becomes of great benefit to the buyer and the seller gains additional income in interest. For example using our previous purchase price of $200,000, financing $120,000 for 5 years at a 6% interest rate calculates to the buyer paying $2,308.49 to the seller each month. In terms of the seller, this adds to the overall purchase price and gains them an additional $18,510 in income. The total purchase price when all is said and done becomes $218,510.
Another common option for financing is through the Small Business Association or the SBA. The SBA supports loans from traditional banks. There are stricter requirements for SBA-backed loans stemming from both the nature of the business and the credit of the buyer. When it comes to the buyer the SBA will mainly look at their credit score, a personal resume, and career background. In doing this the SBA wants to confirm that the buyer is seasoned in either general business operations or within an industry closely related to the soon to be acquired business. On the business side of things, the SBA will generally require 3 years of tax returns, profit and loss statements, the business lease, other licenses, and certificates as well as the business plan to accept and finance a loan.
The final option for financing the purchase price would be to use a non-traditional lender. This route has become a fast-growing option for financing, especially following the recession and the mortgage crisis. These alternatives generally cater to people who need to source cash quickly, who will also have a difficult time obtaining a traditional bank loan because of the credit requirements and the in-depth approval process. There are plenty of alternative lending companies available and more are cropping up quickly - companies like On Deck and Lending Club are a few that come to mind.
Wrapping up our discussion, if you have the desire to own your own business, but are concerned, because of poor liquidity, that this may not be a real option for you, think again. There are various financing options that can support you in your quest to own your own business and a Transworld broker would gladly explore them with you. Our team of brokers is experienced in all aspects of the business purchase and sale process and can help you find a business with a purchase price that will suit your specific financial capabilities. To discuss these options and more schedule a consultation today!
Chris Cantwell brings 20 years of small business experience to Transworld via the restaurant industry. While Chris is diverse in working with all industries, restaurants, hospitality and franchises are his areas of added expertise. He is a member of the Colorado Restaurant Association keeping him up to date on the pulse of the industry.