In the face of major economic changes and challenges in the U.S. today, many people are getting in touch with their entrepreneurial inclinations and starting or buying a business. However, in today’s economic climate, funding by traditional means has become much more difficult. Luckily for the aspiring business owner, many other options exist.
Starting from the closest to home and working out, one option many find viable is to borrow from their own retirement account. It may sound scary at first, but upon further reflection, it becomes easier to recognize this option as just a different way of investing for one’s future. Rather than putting your money in a risky stock market, it can help in the purchase of a new business. The business will give you the means to create a livelihood that will allow you to then invest in a more stable market in the future, and to eventually sell the business, thereby creating retirement funds when you are ready to retire.
Borrowing money from friends and family is another method that may at first feel risky, yet it is a common, time-tested way entrepreneurs gain access to the funds they require to start or buy a business. A few rules of thumb can significantly decrease the risk and stress factors. First, use discretion and common sense in selecting who of your loved ones you decide to approach. Those who may be willing to help, but would put themselves in financial jeopardy are not good choices, and the relationship may be negatively impacted as a result. There are places online where you can find appropriate contracts and lending/borrowing agreements. Taking such measures, many would say especially with loved ones, is a great way to decrease risk. Then, of course, acting with integrity to uphold your end of the agreement can also avoid potential damage to a meaningful relationship where money is involved.
Person to person lending, or social lending, is another way to completely bypass the involvement of traditional lending institutions, and facilitate one individual helping out another. Plenty of information on this financing method is available online, which is how the deal is most often done, and may also be found under “peer-to-peer” lending.
Finally, borrowing from the seller is a financing method increasing in popularity. In fact, many sellers are finding that the sale just won’t go through unless they are willing to finance at least a portion of it. The buyer generally agrees to pay back the seller with interest over a three to five year period.
As you can see, options beyond working within the limited means of traditional lending institutions do exist. However, there is no reason not to hit them up too while you are on the search for financing in the process of the exciting endeavor of launching your own business.
Purchasing an existing profitable business can certainly be a wise investment, especially in contrast to starting a business from scratch. There are a number of shares in the process that can easily be avoided. It will serve you well to start off by considering hiring a professional to assist in buying a business. Business brokers are worth their weight in gold when making such a sizable purchase. These folks can help guide you through the proper methods of Due Diligence, critical in this kind of business transaction.
There are three important areas to consider when looking at buying a business. First is reviewing the company’s income. Since the business is looking to sell, it will most likely have polished up all records to show it in the best light possible. Asking good questions and knowing what to look for will help to reveal hidden costs. If there is equipment, make sure it has been regularly maintained to avoid significant cost as soon as the company becomes yours. Next remember that, essentially, you are looking to purchase an income stream, not isolated spurts. That means that you should look for irregular income items in the records, such as sale of machinery. Then keep in mind that a business in new hands often has higher initial costs until the new owner establishes a rhythm; never assume that you can run the business more efficiently when considering income. Also, never underestimate the income tax impact cutting into profits. Especially if among the company’s assets there is a lot of equipment or property, you need to beware, since such things are generally re-appraised for tax purposes upon a sale.
The second area is staff. Many businesses, especially small ones, pivot around the owner as the key employee. Without the key employee the impact may be unknown. Evaluate as carefully as possible. As far as other employees are concerned, you’ll want to consider such things as whether they are under contracts, if there is a raise schedule, if they have been with the company for long, and if they plan to stay given a transition of ownership.
The final area is negotiating the price you will pay. Never pay for potential. Although it may be listed out and may be nice to consider, make sure you aren’t paying for something that has not yet happened. Along these lines, identify what the primary force driving income is. Sometimes it is the current owner. Make sure whatever it is, it is something you will be able to successfully replicate. If you are presented with income projections, pay more attention to the assumptions made in generating those figures than the figures themselves. Again, wanting the business for sale to shine, the seller or broker may be showing you figures based more on optimistic assumptions than realistic ones.
While seller financing can help push through a sale in today’s tight market, it doesn’t come without a hitch. There are a number of helpful tidbits to know when deciding whether this option is a good one for you or not.
· As the seller, you don’t have to leave money on the table, sitting by squirming while an eligible buyer has to pass you by for lack of funding sources.
· If you have faith that the new owner will succeed with the business it might be the right decision. You will get full paid back with interest.
· Your willingness to finance the sale gives you substantial bargaining power. It will often result in a substantially higher end price, plus, you will be paid interest until the loan is paid off.
· As long as the seller requires a substantial down payment, some of the risk is transferred to the buyer, minimizing your exposure.
· If your feel more apprehensive about the prospective buyer than you feel trusting, this may not be the right option for you. You risk not only the principal and interest on the loan, but may also incur additional costs required to collect the debt.
· Financing more than 2/3 of the sale can put the seller in a far too risky position.
· You may feel backed into a corner, with no other option than to finance the sale, but agreeing to more than you are comfortable with is not going to be to your advantage in the long run.
If you’ve decided that seller financing is for you, it will be to your advantage to include that in your marketing for the sale of your business. LittleBizTrader.com is an online business-for-sale marketplace where it has become evident that the listings offering seller financing get far more hits than those that don’t. BizChecker is an online tool that can be very helpful throughout this process.