Financing the Business Purchase

Where can buyers turn for help with what is likely to be the largest single investment of their lives? For most small to mid-sized business acquisitions, here are the best ways to go:

Personal Equity

Typically, anywhere from 20 to 50 percent of cash needed to buy a business comes from the buyer and his or her family. Buyers who invest their own capital (usually an amount between $50,000 and $150,000) are positively influencing other investors or lenders to participate in financing.

Seller Financing

This is one of the simplest and best ways to finance the acquisition, with sellers financing 50 to 60 percent--or more--of the selling price, with an interest rate below current bank rates, and with a far longer amortization. Many sellers actively prefer to do the financing themselves, thereby increasing the chances for a successful sale and the best possible price.

Venture Capital

Venture capitalists are becoming increasingly interested in established, existing entities, although this type of financing is usually supplied only to larger businesses or startups with top management and a good upside potential. They will likely want majority control, will want to cash out in three to five years, and will expect to make at least 30 percent annual rate of return on their investment.

Small Business Administration

Similar to the terms of typical seller financing, SBA loans have long amortization periods. The buyer must provide strong proof of stability--and, if necessary, personal collateral, but SBA loans are becoming more popular and more "user friendly."

Lending Institutions

Those seeking bank loans will have more success if they have a large net worth, liquid assets, or a reliable source of income. Although the terms are often attractive, the rate of rejection by banks for business acquisition loans can go higher than 80 percent.

Source of Small Business Financing (figures are approximate)

Commercial bank loans 37%
Earnings of business 27%
Credit cards 25%
Private loans 21%
Vendor credit 15%
Personal bank loans 13%
Leasing 10%
SBA-guaranteed loans 3%
Private stock 0.5%
Other 5%

Friends and Family: A Financing Option

The first job facing many prospective business owners is rounding up the cash necessary to make the purchase. They may find that banks have made borrowing difficult (or all but impossible), and that even SBA loans have requirements too stringent to meet. One viable option is obtaining financing from the seller; another is to seek help from family and friends.

Borrowing money from family members and/or friends is one of the most frequently-used methods of small business financing. The pluses are obvious--there is trust, familiarity, and a general comfort level when dealing with those you know. The drawbacks are self-evident as well: "doing business" with family and friends comes with cautionary notes of legendary proportions. Everybody knows that family ventures can be complex and stressful, stirring up "bad blood" and lingering ill will. However, by taking the right preventive steps, buyers can take advantage of friendly financial help.

1. Set up an informal meeting to introduce your ideas.

This is the time to "feel out" friends and relatives casually, being sure they understand that this is strictly a fact-finding (and fact-presenting) meeting. Anyone who is not interested or cannot afford to be involved has plenty of opportunity to say so without feeling obligated--or emotionally "blackmailed."

2. Follow up with a professional business plan.

Those who have indicated interest should now be treated with utmost professionalism. A formal business plan, including detailed financials, and a carefully-drafted business contract should be presented at this subsequent gathering. Consult a business professional for help in establishing a schedule for repayment based on the appropriate interest rates. Nothing will inspire more confidence in lenders than the care taken with this vital paperwork.

3. Be clear about the structure of the business envisioned.

How much voice are investors to have in the business? This is a vital question. Be sure that all parties understand whether this is to be a simple investment or some sort of partnership, and put this agreement in writing.

4. Take care in identifying your borrowing "targets."

Sometimes willing and eager family members can't really afford to invest. If possible, try to spread the borrowing around so that no one person bears the crux of the loan. It may take more energy to get smaller amounts from a larger circle of people, but the safety factors for all concerned will more than compensate for the time spent.

5. Keep your investors involved.

Once the buyer becomes an owner and the new business is in operation, friends and family lenders are due more than their repayment. They will want to be informed and updated about the progress of the business. Keeping in touch is a cost-free way to return the vote of confidence your friendly investors have placed in you.

Seller Financing: Another Option for Commercial Real Estate

Credit markets are forecasted to continue to be tight through 2010. As a result, financing commercial and industrial real estate deals will be tough. We likely will not see what were considered to be conventional terms for real estate deals for some time, so why not consider seller financing if waiting out the market is not feasible?

Why do a Seller-financed deal?
Even credit-worthy buyers are unable to get financing in this market, so Seller financing makes sense if you have a Buyer that can give you satisfactory security and acceptable rate of return. Seller-financed deals are more flexible because you are not dealing with a financial institution's standards for interest rates, maturity dates, and so forth, although the deal will still have to comply with applicable laws regarding caps on interest rates, unconscionable provisions and so forth. In addition, because a lending institution is not involved, a Seller-financed deal may move more quickly.

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Small Business Loans on The Rise

The Indiana Statewide Certified Development Corp. (ISCDC) is reporting an increase in the amount of small business loans made during the first half of the 2010 fiscal year. Officials say they have approved more than $16 million for 22 projects, which is more than double the figures from the previous year.
In good news for the Indiana economy, the first half of fiscal 2010 saw a robust rebound in small business loans made by the Indiana Statewide Certified Development Corporation compared with the same period last year.

The Statewide CDC approved over $16 million in loans for 22 projects, more than double last year’s figures, and the third highest dollar amount in its 27-year history. The loans were made between September 1, 2009 and March 31, 2010.

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Does the Deal Fit?

"The most successful integrations were directed by people who placed the common good of the
combined organization and its customers before all else."
From: The Mergers & Acquisitions Handbook.
By now, most business owners are familiar with the problems created by the merger of Daimler,
the German automobile company, and Chrysler, the American car maker. Here is the classic case
of cultural friction adversely impacting what was originally promoted as the merger of "equals." If
any deal can point out the importance of a cultural fit in a merger or acquisition - this is it. The
officers of Daimler took complete control and the executives of Chrysler left in droves. Not only
were the management styles completely different - centralized versus decentralized, quick
decisions versus decisions by committee, supplier rivalries versus supplier partnerships -- but, in
addition, the American management team received huge compensation packages, while the
Daimler people worked on small salaries, but huge "perks."
Mergers and acquisitions are supposed to produce synergies that bring results. If they don't, the
culture is too often the reason. John Chambers, the CEO of Cisco Systems, who has been
involved in some seventy acquisitions, says that he will not do a deal unless there is a cultural fit.
Culture according to one dictionary is defined as the "customary beliefs, social forms, and
material traits of a … social group." The word "compatible" may be a better choice defined by the
same dictionary as: "able to exist or act together harmoniously." Regardless of the semantics, if
both companies can't work well together, the deal is a bad one. The importance of this cultural fit
may be influenced by the nature of the deal and the desires of the seller. Here are some
examples:

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SOLD!