Saturday, 2 June 2012

Creative Financing To Buy A Business

Is there some way to get into another business without having a big bank account?

Getting into business with no money down certainly is possible and may be easier than you think. Doing so requires the same skills as buying a small piece of real estate without a lot of cash.

Lets say you found a nice duplex thats going for $100,000. Using an FHA 3% loan, it is possible to buy that $100,000 asset with as little as $3,000 down.

The bank will loan you 97% of the money you need to buy the property. Thats called leverage — the asset itself secures the loan required so that you need not come up with a lot of money out of pocket.

That sort of leverage is similarly possible in the business game. Would it surprise you to learn that in fact it is commonplace to get into business with no cash down at all?

The key is to buy an existing business.

While starting a business from scratch with little or no money is doable, its difficult because financing a new startup is just about the riskiest loan a bank can make; lenders are much more apt to lend you money to buy a business with a track record.

So if you want to get into business, but dont have a lot of money, the secret is to buy an ongoing business and apply the same sort of leverage financing techniques used in real estate transactions.

There are many ways to structure such a deal. The first step is to secure the largest part of the financing — usually 60% — 70% or so. This can be done in one of two ways.

First, there is bank financing. Again, because the business has a track record, and presumably some assets (accounts receivable, cars, machinery, etc.), getting a bank loan shouldnt be too difficult.

Second, consider seller financing. Sellers are surprisingly often willing to finance much of the deal. Seller financing is great because:

Sellers may finance as much as 80% of the deal, while banks usually top out at around 60%. 100% seller financing is not unheard of either.

Sellers usually offer better terms. Whereas a bank may charge you 10%, a seller may offer financing as low as 7%, and the payout may last much longer (10 years is not uncommon.)

The best thing is to combine bank and seller financing. Lets say you want to buy a restaurant worth $100,000. The bank may be willing to loan you 60%, and the seller may chip in another 25%.

All you need now is to find another 15% and you have bought the business with no money down. Where do you find that $15,000?

There are several options:

Liability financing: Sellers will usually include in the cash price the amount they need to pay off creditors. If you agree to assume those liabilities however, you can reduce your out-of-pocket down payment by that much. Assuming $15,000 in liabilities is not hard to do.

Cash flow financing: If the business earns $10,000 a month, offer to pay the $15,000 balance in three payments after closing of $5,000 each, spread out a month apart. For a business that makes $10,000 monthly, that should be easy.

Or, consider having the seller retain the accounts receivables and reducing the purchase price by that amount.

Inventory financing: The purchase price will take into account the value of the inventory. If you are short $15,000, ask the owner to liquidate $15,000 in inventory, and then reduce the purchase price by that amount.

Asset financing: Arrange, before the sale, to sell one of the business assets at closing to help finance your purchase: Equipment, patents, trademarks, trucks, office space, etc.

Broker financing: 70% of all business sales are done through a broker. To keep a deal, almost any broker would be willing to forgo part of his or her commission and put it in the pot for the seller.

My brother sells commercial real estate and it is not uncommon for him to (sadly) kick-back part of his commission to close a deal.

Supplier financing: Major suppliers who want to keep the business business may be willing to loan you some money for closing a deal if it means they will continue to have a major account.

As you can see, there are many ways to creatively finance a business purchase with no money down. The key is to find a willing seller and get creative.

1 comment:

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