Financing The Sale
One of the most difficult things to do is finance the business you are interested in buying. More and more buyers are being turned down by banks and private lenders because they are not properly prepared for the process of obtaining a loan.
There are three sources of money used to buy a business.
- Funds you contribute
- Borrowed Funds-Banks, Private Lenders
- Borrowed Funds-Owner of the Business
Unlike residential loans, there two types of underwriting going on at the same time.
- Underwrite you as the buyer
- Underwrite the business (without you).
Many people believe the buyer only has to meet certain criteria and they are good to go (which is the formula for residential mortgages). But this is not true! The business has to be underwritten by the lender, as well. Both have to “pass muster” in order for you to get a loan. This is even true when the seller provides part of the financing.
Depending on the business, you will have to have a down payment that shows you have an acceptable amount of “skin in the game.” Lenders want to know that you are as willing to risk your money…just as they are willing to risk their money. Generally, the more money down you have… the better the lenders like it!
Next, you personally (partners included) will have to be underwritten. This means the lender will look at your personal credit score, character, business experience (for the type of business you are buying), personal collateral they can encumber if you don’t pay them. Sometimes, they will even make you buy a life insurance policy, payable to them just to be sure they have covered all their bases.
Lastly, the business you are buying will be underwritten to be sure it meets the lenders criteria for lending to this type of business. They look at things like, “free cash flow”, DSCR (Debt Service Coverage Ratio) and the Market Value of anything of value in the business you are buying. They will also require a 3rd party “Valuation” (which you will pay for) to confirm their thinking about how much to lend you. Businesses are valued not appraised like houses!
The owner may wish to offer some of the financing for two basic reasons:
- aiding your “bank role” will help them sell the business quicker
- once they understand the potential tax implications, they determine that owner financing (installment sale) will be less of a tax burden.
Owners are often call upon to be bankers and are seeking professional advice more frequently. They want to sell but they also want to be paid according to the financing agreement.
This process is very detailed and requires the cooperation of both the buyer and the seller. If either is a “slow poke” with the information gathering process, it dramatically slows down the process.
As a buyer you need to know what you are qualified to borrow before you buy a business. This is called pre-qualification which happens to both the seller and the buyer. We recommend you go to www.easysba.com. Steve Mariani and his staff are one of the most qualified financing organizations in the world of buying a business. Steve’s group will pre-qualify both the company you want to buy and yourself…so that when you are ready…you will really know what is real and what is just fluff.
Believe us – you will not be sorry. Diamond Financial Services are the real deal and they do what they say they will do!