Benefits of Financing
There are numerous advantages to financing a sale for both sellers and buyers.
You receive cash at closing, which is almost always the preferred outcome.
With seller financing, you receive sale proceeds over time which may have tax benefits.
You can purchase a larger business with more earnings.
You can purchase commercial real estate if included in the transaction.
The loans are paid down from operating income of the business.
Interest on the financing is tax-deductible.
There are a few primary financing options to consider:
1. Buyer personal funds
2. Seller financing
3. SBA financing
4. Retirement plan funds
5. Other financing sources
Buyer Personal Funds
In most small business sales, a buyer will need to have 20% or more of the capital needed to finance the deal. Additionally, a buyer will need to ensure they have adequate working capital to operate the business after close.
A very common way to finance a business sale is through a seller note. For example, a price of $800,000 for a business with 50% seller financing would result in the buyer putting $400,000 down with the remaining $400,000 paid to the seller over time. The advantage with this financing method is the flexibility with the price and terms to best meet the needs of the buyer and seller. In addition, a deal can happen much quicker than with other financing sources.
Almost all third-party financing to purchase a small business is through the Small Business Administration (SBA). The buyer can obtain attractive loan terms and interest rates while reducing or eliminating the need for seller financing. The way the SBA programs work is that a participating lender will lend money for a business acquisition and the SBA will guarantee a significant part of the loan made. This limits the risk for lenders thereby encouraging more loans in the program.
There are two primary SBA programs used for business-related acquisitions - the 7(a) Loan and 504 Loan.
The 7(a) Loan is the predominant loan used for a business acquisition, which has a loan maturity of 10 years that can go up to 25 years when commercial real estate is included. The 504 Loan can be used for commercial real estate, equipment and related business fixed assets. Both loans have a $5 million maximum loan amount and require a down payment of 10% or more. The 7(a) loan offers mostly variable interest rate options while the 504 loan offers a fixed interest rate. Check with an SBA lender for more details.
Some of the SBA loan approval criteria to consider include a buyer's personal and business credit worthiness, management experience, strength of the business, ability to repay the loan with earnings from the business, nature and value of collateral, and past earnings, projected cash flow and future prospects of the business.
We have relationships with many of the top SBA lenders in the country to assist you.
Retirement Plan Funds
One often overlooked financing option is to use your retirement plan funds to finance your business acquisition and start up costs. This not only minimizes the amount of personal funds and other financing needed, but can be completed without paying upfront taxes or early withdrawal penalties, while also allowing the stock of your new venture to grow in a newly formed retirement plan. You also won't have debt payments, providing more cash for you and your business.
We have relationships with the leading providers of this service to assist you.
Other Financing Sources
The above four options cover the majority of financing sources used in a small business acquisition. Other options may be available depending on your unique circumstances.