Financing the Purchase

Buyer’s Equity

The initial source of financing for prospective business owners is their own money, also known as the BUYER’S EQUITY. On average between 20 and 50 percent of cash needed for business acquisition comes from the Buyer and his or her family. Buyers should decide how much capital they are able to invest, and the actual amount will vary, of course, depending on the specific business and the terms of the sale. It is rare that a Buyer will have sufficient capital available to purchase a business for cash. The alternative is to finance the business purchase through seller or third-party financing.

Seller Financing

The best and usually least expensive financing option is SELLER FINANCING. The terms offered by Sellers are usually more flexible and more agreeable to the Buyer than those offered from a third-party lender. Sellers will typically finance 50 to 60 percent and sometimes more of the selling price, with an interest rate below current bank rates and with a far longer amortization. The terms will usually have scheduled payments similar to conventional loans.

Seller financing can attract Buyers and lead to a speedier sale. If the Seller offers financing, then the sale is accomplished more quickly. Third-party lenders tend to move much slower than Sellers, even when they do approve a loan. A Seller is more likely to grant a loan request, approve a transaction, and close it as fast as the attorney can get the agreements prepared. A Seller may also gain some tax advantages and interest income by offering to finance the sale of his business.

Small Business Administration (SBA)

Many buyers do not have enough of their own money to cover all the costs of purchasing or starting a business and will need additional financing. A source of business acquisition capital is through the US Small Business Administration Loan Guarantee Program.

An SBA GUARANTEED LOAN is arranged through a third-party lender. The loans offer favorable financing terms and usually have longer amortization periods; ten years for business acquisition or longer terms if the transaction includes real estate, and up to 80 percent financing or more depending upon the type of business, experience and qualifications of the Buyer. The Buyer seeking the loan must prove stability of the business and must also be prepared to offer collateral; machinery, equipment, inventory, and/or real estate. In addition, there must be a verifiable cash flow from the business in order to insure that loan payments can be made. In some cases where there is inadequate cash flow, the Seller may be required to offer financing for a portion of the loan amount and their promissory note placed in a standby position until the cash flow is sufficient to amortize both the primary and secondary notes. In almost all cases, the Buyer will have to offer personal collateral, such as his or her house or other property.

For more information on the SBA Loan Guarantee Program and programs available to Buyers, please consult the SBA Website. Your CII Advisor can help you with this process. CII maintains a current database of active SBA lenders throughout the region.