To many buying a business may seem like an unaffordable pipe dream, but Transworld Business Advisors is here to tell you that simply is not true! There are a number of financing options for buying a company and if you work with a professional business broker, there is often room for creativity when it comes to structuring a deal to ensure a buyer can buy their ideal business and the seller receives the ROI they are hoping for.
Cash is King!
The first option to finance the purchase of a business is an obvious choice, cash, and is usually part of most business acquisitions through the down payment. While taking cash out of savings is simple enough, there is also the opportunity to withdraw money from your 401K to invest in your business. This option can incur tax penalties, but there is a way to structure a 401K withdrawal to minimize taxes, by establishing a C-corporation and essentially buying stock in your business. The last option for using cash to buy a business is through a home equity line of credit (HELOC).
Traditional Bank and SBA Loan Methods
Another option you may be familiar with is the conventional bank loan. This loan option is not often used to buy a business, but is still available if it is the best fit. A more traditional loan option to finance the purchase of a business is to use an SBA Loan which is a loan that is guaranteed by the Small Business Administration (SBA). There are quite a few SBA preferred lenders in Colorado and across the United States that have been pre-approved to extend small business loans and can make the SBA loan process smooth sailing. Most SBA loans require at least a 10% down payment in addition to the loan amount and some pre-requisite requirements that will need to be met, including a business plan.
The Exciting World of Seller Financing
Many business buyers are not familiar with the seller carry or the seller financing option for financing the purchase of a company. Seller financing can be described exactly as it sounds - the seller of the company finances a portion of the business purchase. Similar to the SBA loan method, seller financing usually requires a down payment, as well as interest on the loan amount. One of the major considerations for this financing option is to make sure the terms of the loan still allow for a good level of cash flow within the business. The unique piece of seller financing is that the seller still has a vested interest in the success of the small business, often making themselves more available to the new owner during the first few years of the transition to the new ownership.
Have Any Wealthy Acquaintances?
One of the last options for financing a business acquisition is gathering investors. Maybe you have a family member interested in investing in your entrepreneurial endeavors or a local venture capital group that makes small business investments? The investor route requires a private agreement between the buyer of the business and their investors to outline the terms of the financial agreement. In an ideal world the terms of this financial agreement would be set up before the business acquisition purchase process has even begun.
If you are interested in learning more about the financing options for buying a company, schedule a free consultation with one of our business brokers or visit our website for more information.