Are planning to become an entrepreneur? Buying an existing business could be a better option than starting from scratch. You get the benefit of purchasing an established profit-making company that has been around for some time. Of course, you must know the basic rules regarding how to buy a business.
First things first: Where can you get the money to buy a business?
Obviously, it is crucial not to pay too much for the company that you acquire. If you overpay, it could result in a poor return on your investment, and you may find yourself making a lower profit than you had anticipated.
And then there’s also the question of arranging the money to pay the purchase price.
If you have adequate funds of your own, this won’t be an issue. But most entrepreneurs look for external financing. You could consider taking on a business partner or opt to sell stock to employees. You could also take the traditional route of applying to a bank for a loan.
However, raising funds usually comes with its own set of problems. Borrowing cash could involve putting up collateral or providing a personal guarantee. If you enter into a partnership so that you don’t have to put up all the money yourself, you may have to partially relinquish the control over your business.
What if you knew how to buy a business without having to pay the entire purchase price to the seller immediately?
That is precisely how many individuals purchase an existing business. They pay a part of the price, and the remaining amount is paid for by “seller financing.”
How to buy a business through seller financing
If getting a loan is a problem and you’re wondering how to buy a business that you have identified, seller financing could provide the answer. As its name implies, it is a mode of paying for the company that you are buying by raising money from the seller.
But why should the seller be willing to help you pay for your purchase? There are several reasons for this. These include:
- It will help to close the deal – the transaction could be delayed, or you may even think of canceling it altogether because you can’t raise the money. In a situation like this, the seller could come to the rescue by putting up between 10% and 60% of the price. In some instances, this percentage could even go up to 90%.
- It helps to establish trust between the buyer and the seller – if the seller is willing to accept payment over an extended period, the buyer’s confidence in the transaction is likely to go up. The repayment period could be as long as ten years.
- It can be a win-win for the seller – although there is a certain degree of risk to the seller in extending this type of financing, there are some safeguards that are available. For example, the seller could insist on carrying out a credit check before extending finance. The buyer may also be required to put up some collateral.
- It can provide a steady stream of cash inflows – the repayment that is received by the original business owner could include interest. This provides the seller with a source of extra income that could extend over several years.
An example of seller financing
Harold Ludwick works at an auto repair shop. He has been employed there for 20 years. The owner of the business, Dominic Jordan, is planning to retire in six months.
Harold thinks that he can run the business and expresses his desire to purchase it. The only problem – he doesn’t have enough money. Dominic wants $180,000, but all that Harold can come up with is $25,000.
After holding extensive discussions, they agree on the following terms:
- Harold will pay $25,000 immediately and the remaining $155,000 over the next ten years along with interest at the rate of 5.5% per year.
- Dominic will be available to provide advice whenever it is required.
- After buying the business, Harold will start the process of applying for an SBA loan. If his application is approved, he will use the money to repay Harold.
Who’s involved in the process of seller financing?
When you are working on how to buy a business, it’s crucial that you get professional help.
Several different individuals can provide you with invaluable advice on how to buy a business.
- Business broker – buying a company can be a complicated process, and it can involve complying with various rules and regulations. A business broker’s advice on practically every matter regarding how to buy a business can prove to be very useful. A word of caution: business brokers usually represent the seller, and it is the seller who pays the broker a commission. Consequently, the broker’s primary responsibility is to the seller. You should bear this in mind when interacting with the broker.
- Accountant – it’s crucial to scrutinize the target company’s books. Retaining an accountant who has experience in this field of work is an absolute necessity. This individual will be able to tell you whether the company’s financial statements reflect an accurate picture of its health.
- Attorney – having a competent attorney on your side is another basic requirement. You will receive advice on the legal aspects of how to buy a business. Additionally, your attorney will review all the documents that need to be signed during the acquisition process.
The business broker (who represents the seller), your accountant, and your attorney will help you to decide whether the company that you are planning to buy is worth the asking price. At this stage, you will have to initiate the paperwork that is required to close the deal.
Legal documentation for a seller financing transaction
Here is a brief description of the various documents that you could have to enter into to finalize the purchase of the target company:
- Letter of interest – this is usually made at the initial stage. It lays down a framework for the process to be followed for the due diligence and negotiations.
- Deal Contract – this is a confidential document that provides the broad terms of the transaction. The buyer and seller may make mutually acceptable changes.
- Promissory Note – this lays down the terms and conditions for seller financing. The amount that the buyer needs to repay and the dates of repayment are mentioned in this document.
- Security Agreement – the seller financing arrangement may require you to put up some collateral. This document describes the procedure to be followed in the event of default in repayment.
When you are addressing the issue of how to buy a business, you must pay adequate attention to the legal documentation. An experienced attorney who specializes in this field can be a great help. You should appoint the attorney as soon as possible. However, if for any reason you don’t do it, there is one safety measure that you must take: don’t sign any document provided by the seller unless you first get it checked by your attorney. Additionally, you shouldn’t enter into any written communication with the seller without taking a similar precaution.
Seller financing offers great benefits
If you are trying to figure out how to buy a business when you don’t have enough money to pay for it, seller financing can offer the ideal solution. Of course, you probably need to arrange a substantial portion of the cost of the business yourself. The seller would typically agree to finance a small part of the acquisition cost.
After you have bought the business, you need to concentrate on running it successfully. It is likely that you would need additional funds for making capital purchases. You may also require cash for marketing the company’s products or for making other improvements.
How will you raise this money? One excellent option is to apply to Camino Financial for a business loan. You can make an application as soon as you have completed nine months or more of running your new business.
Submitting your application will only take a few minutes, and it won’t affect your credit score. The money that you raise through Camino Financial could give you the funds that you need to help your new business to succeed.