Buying a Business
How to Get a Loan to Purchase a Small Business
Written by Domenic Rinaldi for Gaebler Ventures
Getting traditional financing to buy a business isn't easy these days. Banks aren't lending much, but by tapping into your own retirement savings or turning to your family for loan, a deal can be done. And you may find the terms more appealing.
Today's economy has led to many interesting business opportunities, yet there is one troubling problem that can be very frustrating for an aspiring entrepreneur.
Banks are not lending much right now. Sure, a few deals are being done but overall, the type of cash-flow lending that has traditionally helped entrepreneurs buy a small business has come to a halt.
That doesn't mean deals are not getting done. Rather, if you're motivated to buy a small business and willing to be a little creative, there are other avenues to consider.
As the nation works through this current economic crisis, more people than ever have expressed an interest in being their own boss. And why not? It's appealing to be your own boss and break free from the corporate handcuffs that often unjustly control your fate.
Yet the process of buying a business can be intimidating. So, as a business broker specializing in helping people buy, grow and sell businesses, I'm often asked about creative ways to get a deal done. So what follows are a few alternatives to traditional bank lending.
Frankly, depending on the business you want to buy and your financial position, some of these ideas could provide a more reasonable option. If nothing else, these options could get a deal done faster.
Seller financing
This is the most popular and, typically, most palatable option for both buyer and seller. Of course, the challenge is to find a business owner that is willing to sell his or her business to the buyer. In its most basic form, seller-financing means the business owner acts as the banker in order to sell his business to you.
I've written about seller financing before from a business owner's perspective and, as a business broker, I know many selling business owners who are considering this type of deal.
From a buyer's perspective, seller financing can be attractive.
For one, business owners will not adhere to the strict, by-the-book-lending guidelines banks need to follow. Second, they will be far more motivated to get a deal done. And, critically, the right business owner will be a valuable consultant as you learn how to build your new business. Of course, if you want no communication with the previous owner as you start your business-owning career, seller financing may not be an appealing option.
Family and friends
This is old school financing and it remains a popular and valid choice today to raise funds. Depending on the size of the business, and your persuasive abilities, it's conceivable you could raise enough money to buy a business with cash. Or, maybe you raise more than half of the needed funds, and use a small business loan for the rest of the financing. When a bank sees you're willing to use a sizable portion of your own funds to purchase a business that can make it a lot easier to get a loan for the rest of the business.
Of course, you'll need to pay your family and friends back--with interest--and by agreeing to take their money, you'll enter into a new and sometimes uncomfortable relationship with people close to you. Be prepared for awkward conversations about the investment at weddings, unsolicited advice on how you should be managing your business and unexpected inquiries about putting nieces and nephews on the payroll.
Tap into your 401k funds
This method is starting to gain traction because it's essentially writing a loan for you. Plus, there are tax benefits (and penalty-free methods) to tapping into your own 401k plan for buying a business.
This self-loan is better suited toward a smaller business purchase. The ideal candidate for is the long-time corporate employee who has done well with the company's retirement plan. (Sadly, those plans may not be as rich as they were 12 to 18 months ago.)
One company that offers this type of loan is called BeneTrends Inc. (www.Benetrends.com). This company is a good place to get more details on how you can use your existing 401k plan to buy a business.
Divest stocks and bonds
Like the 401k option, this is another way to tap into your own resources to buy a business. Heck, considering how the market has performed recently, you've probably considered divestiture anyway. Why not bet on you instead of the financial instruments those Wall Street sharks have created?
Consider this: If you buy a business that has consistently generated a good cash flow, you could be looking at a 20 percent annual return on your investment. Are your stocks, bonds and mutual funds doing that well? There is no guarantee that a business you buy will offer such a return, but there are some candidates to consider that might.
In general, those candidates are businesses related to health care, information technology and, in this economy where everyone wants what they own to last longer, repair services. These include businesses that repair cars, copiers or computers, for example.
Venture capital or private equity
Venture capital funding is typically--but not exclusively--an avenue for technology start-ups. A VC firm (or several) offers funding in exchange for a piece of your company, with the expectation that one day, the company will be sold to a bigger operator or that it will go public. Candidates for venture funding include small, promising companies with actionable ideas or a great solution to a common problem. Google, for instance, wasn't the first search engine but it has proved to be the most popular. Early backers of Google, of course, are very wealthy today.
Private equity funding, likewise, is offered in exchange for a piece of the company. This funding typically comes from institutional investors comfortable with big deals for established companies. This is not a likely source of revenue for buying a smaller company, but there are private equity firms interested in such deals.
In both cases, with VC funding or private equity, the dealmakers want a solid management team in place before they will invest in the company. A successful track record matters here, so if you're a first-time business owner or buyer, it's unlikely to get this type of financing.
Domenic Rinaldi is president and managing partner of Chicagoland Sunbelt, a business brokerage firm that focuses on helping people buy and sell businesses in Chicago and the surrounding Midwest area. Rinaldi is a Certified Business Intermediary (CBI) from the International Business Brokers Association and an expert in the business brokerage field. He brings more than 24 years of experience in merger/acquisition, sales, service, marketing and operations to the business brokerage arena. Domenic can be reached by phone at 773-243-1603.
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