We would like to reconsider the issue of ownership financing for a big reason:
It can only be the last way and the best way for a budding entrepreneur to buy a business these days.
Realize that banks do not lend to those who want to buy a business and to even have them look at your business, you have better two or three times the security in relation to the potential loan amount whether the business is extremely profitable or not and just because they can look at your business loan request does not mean they will approve it.
Even nonbank lenders do not lend to buy a company if it does not come with a large amount of real estate and then they will only finance based on a small securities of that property.
It leaves two options for most who want to buy business of their dreams:
1 Friends and family called friends, family or fathers. But if you do not have a very rich uncle, most of your friends and families are also faced with funding constraints and it will also not help you make a big purchase like buying a business.
2 Ownership. Where the current owner of the business is willing to sell it to you on terms which means they not the bank keep the note.
This is what we will discuss here because this really can be the only way to buy a company today.
Ownership can favor the buyer you in several ways:
1 Its easier to qualify because you do not have to jump through all the hoops that banks or lenders allow you to run through like cash flow analysis, property assessments, debt ratio, personal accounts etc.
2 Better conditions than most banks will offer, thus saving the new owner buyer both time and money not to mention less about reporting current financial statements and returns and fewer covenants.
3 More than just funding, as the current owner still has a share in the companys success, they will provide invaluable guidance and advice into the future.
Plus, if the current business owner believes in the business and you can make them believe in you that should be a good thing for the owner. If they hesitate without giving a very good reason, it may be a red flag for you because it can show that the current owner does not believe in the companys longterm profitability they know something is wrong or in decline.
Lets look at an example to show how ownership financing works:
Lets say you find a company for sale a company that you know you will have the necessary passion to work hard and grow beyond what it says today.
The price of the business is $ 100,000 but you tried to get a bank loan, an SBA loan and even a nonbank loan and have just heard something other than NO.
Here you approach the current business owner and lure them to sell you when you wear the note.
How your business will work:
You tell the current owner that you will give a little advance payment this is to show good faith and provide a small cash incentive to the current owner.
This payment should be about 10% but may be less depending on how much you can raise. But raising $ 10,000 is much easier than raising $ 100,000. Plus, any bank or lending would require you to set up more than 10% so 10% is really a profit for you!
Now, if you drop 10%, it means that the current owner would need to fund the remaining 90% or $ 90,000.
How to get there:
Specify that you will pay both the principal and a comparable market rate lets say for this example 10% APR amortized over 7 seven years choose a term that makes payments for you and for the current owner.
But you will also include a balloon payment of 3 three years so that the owner gets a full exit if needed.
In the longer term 7 years you will receive a breathing room by making your payment affordable the longer the time, the lower the payment.
The balloon payment which means that even if the loan is depreciated over 7 years, the remaining amount after 3 years will be paid in full the balloon period gives the current owner a resort in a short period of time and gives you time 3 years to settle in industry so when time comes, you have a record that you can take to the bank to fund the balloon balance.
Plus, if both are happy with how things go You can always refinance the balance balloon with the current owner at the 3 year anniversary date.