What are some of the possible ways to finance the purchase of a business?
Demographic changes suggest that there will be many business that change hands over the next ten to twenty years. Some of the sales will require creative financing. Following is a list of a number of ways a transaction can be financed.
1. - Seller Financing - Today, many buyers and lenders look to the seller for financing. In such a scenario, the seller will hold a note at an agreed upon interest rate for a specific term or amortization.
Many agreements call for a balloon payment to be due to the seller three to five years after the purchase date. This provides the buyer time to get the business up and running.
When a seller provides financing, lenders will feel more comfortable participating in a transaction. This is because lenders know that the seller has a vested interest in seeing the business succeed thereby reducing their risk .
2. - SBA Loans - Conventional loans are generally not available to finance the purchase of a business. However, a potential buyer should explore the lending programs offered by a Small Business Administration (SBA) lender.
Again, lenders typically look favorably upon SBA loans, as the SBA guarantees a portion of the loan. The buyer will pay an SBA loan fee that may allow the lender to provide financing that they couldn't do conventionally. The lenders' loan is mostly protected. If an SBA guaranteed loan goes into default, the SBA will pay the lending institution up to 75 percent of any deficit left after liquidating the underlying collateral.
3. - Earnouts - Earnout financing involves the seller receiving certain payments after the sale. The payments are based on the ongoing performance of the company. The structure of an earnout can take many forms and can be based on many different financial benchmarks such as a company’s revenues, gross profits or net income. Earnout financing is typically used for companies that are in a turn around situation or when buyers are purchasing on potential, rather than on historical cash flow.
Example of a Funding Scenario -
Purchase Price: $1,000,000.00
Buyer Down payment: $200,000.00 (20%)
Seller Financing: $200,000.00 (20%)
SBA Guaranteed Loan: $600,000 (60%)
In the above transaction, the buyer would be have a 20 percent down payment, the seller will hold a note for an additional20 percent, and a lending institution would provide an SBA guaranteed loan to cover the difference. Once a financing scenario is established the buyer, lender and Capital Advisors will evaluate the company’s cash flow to be sure it will cover their debt service and provide a reasonable return. The lender will also conduct their own due diligence on both the buyer and the company.
In today's lending environment, creative financing tactics are becoming commonplace. Capital Advisors will assist you in obtaining information about how much the current business owner is willing to finance or if he or she is amenable to an earnout arrangements. We will provide financing recommendations based on the sellers' needs and your available capital.
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