In our previous posts (part II and part II) we discussed  some sources for business acquisition financing. This is the final segment of this subject.

Seller

If you purchase an existing business, the seller often offers financing for a portion of the purchase price. Expect better negotiation power with seller financing during a down-turn in the commercial real estate market.

In some cases seller financing is unavailable. When the business seller does offer financing, this solves not only solves the financing problem; but validates that the seller believes the business offers sufficient cash flow for supporting the new owner and his/her ability to replay the business acquisition loan. The seller stays invested for the duration of the loan, ensuring the buyer a willing assistant for business success. A seller jumping in the business boat with the buyer, now that’s great advertisement!

With seller financing, a buyer stills needs a plan for a down payment of approximately 25% to 50% of the purchase price. As with financial institution financing, expect market driven interest rates with seller financing, though with more flexibility.

Seller financing exacts a price. Just like a finance company or bank, the seller wants information about the buyer before making a financing commitment. The seller expects background information, including work experience, education and a sense of the business savvy of the buyer.

Prepare for selling your qualifications if you want seller financing. Just as you need a sales pitch about purchasing the business, the seller needs the confidence that you possess the business savvy for repaying the loan and not ruining the business. Assuming you want to purchase the business and expect seller financing, offer the seller your financial statement, list of references, a copy of your clean credit bureau report and any background information he might need. This demonstrates good faith, professionalism and an understanding that business is business.

Be forewarned that most financing from a seller comes in the form of a balloon note. A balloon note allows the seller’s removal from the business within a reasonable time and yet gives the buyer a reasonable time for repayment through business profits. If full repayment still isn’t possible, the buyer gains valuable time building a track record for financial institutions demonstrating the business is a reasonable risk. Sellers usually amortize notes with regular monthly payments kept low and a very large balloon payment at the end of the specified note term. Depending on the movement of interest rates, buyers may refinance the balloon note early once they’ve established a good credit and find a financial institution with more favorable rates and a longer term. Balloon notes offer both buyers and sellers a win-win situation.

401(K) and IRA Accounts

Recent rules developed by several large national CPA and attorney firms, and receiving approval of the IRS allow purchasing a business with 401(K) and IRA accounts without tax penalty to the account owner.

Funding a business acquisition with 401(K) and IRA accounts do involve legal and accounting fees. Best sources for information of these fees come directly from your lawyer, accountant or a reputable business broker; but expect the fees to be less than tax penalties for early withdrawal of these funds. My business brokerage firm, VRBusinessLakes, continually develops relationships with both attorney and CPA firms who specialize in these types of financing transactions. Let us know if we can make a referral.

A Trifecta!

The five new business financing sources listed are not mutually exclusive. Buyers can use one or a combination of these sources for a business acquisition. I recently handled a transaction in which three of the five sources were used to buy the business.

It’s called creative financing!