One prevalent misunderstanding among potential business buyers is the belief that acquiring a business requires putting 100% of their own capital at risk. Fortunately, this assumption is flawed. Exploring this further, there are two primary financial approaches commonly employed when purchasing a business:
1. **Small Business Administration (SBA) Loan:**
The SBA loan is a government-backed initiative where Uncle Sam guarantees a portion of the loan obtained through a bank to facilitate the acquisition of a business. The process involves applying for a business loan with a bank, and upon your approval, the bank notifies the SBA of your intention to secure a business loan. The SBA conducts due diligence on both you and the business in question. If everything meets their criteria, the SBA guarantees a portion of the loan from the bank, offering benefits such as competitive interest rates and a down payment of 10%-25% at closing, making it a financially feasible option. Utilizing an SBA loan typically results in a closing period of approximately 90 days.
2. **Seller Financing:**
In this scenario, the business seller effectively becomes the financier. For instance, if the sales price is $250,000.00, you, as the buyer, pay half of this amount (50%) at the closing. The remaining balance is then paid in monthly installments, subject to an agreed-upon interest rate (typically between 6% and 8%) over a specified period, often 45 to 60 months. The key advantage of seller financing lies in its flexibility compared to the more stringent requirements of traditional bank loans. Moreover, deals structured with seller financing can often be closed within an average timeframe of 30 to 45 days.
Both the SBA loan and seller financing are widely utilized methods in business acquisitions. It is advisable to refrain from using 100% of your funds for the acquisition whenever possible. Instead, consider financing between 50% and 90% of the purchase price. This not only facilitates the allocation of operating capital for post-closing needs but also allows for the establishment of reserves to address unexpected events.
For more on buying and selling a business and how financing can work contact Tampa Business Broker Michael Shea of Transworld Business Advisors of Tampa Bay.
Michael Shea P.A.
321-287-0349
mike@tworld.com