 | Steve Fischer is the president of Advantage Business Group in Wichita, an owner in the VR Business Brokers network of offices. With national and global reach, VR is one of the nation’s premier networks of professional business intermediaries. A life-long Kansan and previous business owner, Steve’s office exemplifies the service and professionalism that a business brokerage provides to the buyer and seller in today’s market. To learn more, visit www.VRplains.com or www.VRBB.com. Steve can be reached by phone at 316-262-8722. |
Business
2010-09-01 13:38:00
Financing the business sale
Answer: Understanding the Engagement from the Buyer and Seller:
Whether you’re looking to buy or sell a business, the biggest challenge can come from how the financing is going to take place. Many factors influence the selection of the right avenue for both the buyer and seller. Regardless of the side you’re on, you must be aware of the options available and methods employed when financing a business. Both sides have to know how this part will be accomplished in order to have a successful transaction.
From the Seller’s End:
If the seller wants all cash, he or she is making it clear they don’t want to be involved in any kind of seller financing. The buyer will either have to use the liquid capital they have available or seek to obtain a loan. In the latter case, the business must qualify for a loan through an approved lender. The seller will have to produce a list of items from the approved lender in order for the business to be approved – ie. Tax returns, financial statements, pro forma operating statement for next three years, procuring a lease to allow for a sufficient occupancy window to match the loan term.
From the Buyer’s End:
If a buyer does not have the capital to make the purchase, they may qualify for a bank or SBA guaranteed loan. Most states follow similar requirements for obtaining a SBA loan.
Cash Equity -
Depending upon the buyer’s experience with the kind of business being purchased, the approved lender will require cash equity – at least 20% with experience, at least 40% without it.
Credit and Life Insurance -
With most approved lenders, the buyer must have a solid credit record as well as carry decreased life insurance in equal amount to the loan.
Property and Investments -
Approved lenders may ask you to pledge nonresidential real property and investments as collateral for the loan – IRAs, 401Ks and Keogh investments are exempt from this.
With an SBA loan, you may have to wait the 30 to 45 day processing period before obtaining approval and funding. You also have to be willing to hold the business for half of the note term before selling by assumption or refinancing.
Option for Seller Financing:
In many cases, the seller may be willing to finance the sale. If so, a few areas have to be addressed.
Financial Statements and Credit
Checks -
The seller should perform a credit check on the buyer. They can also require them to send copies of the business’ financial statements once ownership has changed hands. However, the buyer doesn’t have to encumber his other assets in the agreement.
Payment and Liens -
Unlike the cash equity of a loan where the buyer has to pay anywhere from 30% to 50%, in the case of seller financing, the buyer will have to pay anywhere from 50% to 70%. In addition, the buyer holds the right to prepay the note in full or in part without penalty. The seller should also have a recorded first lien on all assets of the business.
