At Crowne Atlantic Business Brokers, not a week goes by when we are speaking with a buyer and we ask how they will purchase the business for sale, and the buyer’s reply is (drum roll please)………money is “no problem.” This comment is used widely by buyers when speaking with both business brokers and business owners, and this statement is tough to hear because money always seems to be by far the largest issue in any transaction. In fact if every business buyer had more than enough financing available, there would be a much higher percentage of sold businesses. Most buyers however phone business owners and business brokers without even giving a second thought as to how they would make these purchases. They are hoping that a business opportunity will prompt them to begin to think about how they might purchase a business and where the purchase funds might come from.
The reality is that both seasoned business owners and business brokers know better. Both of these groups know that financing for small businesses is often times tough to put together. However, an overwhelmingly large majority of the potential buyers that contact us on businesses for sale surprisingly feel that money will be readily available. They feel that obtaining money that they currently do not have for purchases can be found with little or no problem. While it is difficult to determine why this is the case, it is possible that many business buyers believe they can easily get a business loan, because one can theoretically get a loan for a large purchase of just about anything in the United States. People can get a loan for a house, a car, a boat, a piece of property, jewelry, education, and if people can’t get a loan for an item they can put it on their credit card. However this easy money does not exist in the world of small business when it comes to purchasing an existing business. We felt it may be important to dispel some widely prevalent myths in the world of small business purchasing and financing.
1) I can get a bank loan for any business purchase.
This is the one that business brokers and owners hear most from buyers. Many buyers assume that banks will finance any business purchase simply because they ask them to or they put together a business plan. Business buyers have to understand that even if they are dealing with their own personal bank, in most cases a loan for them requires them and the business they are looking at purchasing to follow the same protocols as everyone else. These include the buyers qualifying for a loan and the business they are looking at to qualify for a bank loan.
2) The Seller of the business will finance the purchase of the business for me with no money down or with a 20% down payment.
While it is true that a large majority of business purchases in the country have some sort of element of seller or owner financing in the transaction, the reality is that buyers still need to come up with a hefty amount of money for a down payment. As business brokers in the Orlando and Central Florida area, the majority of deals that we see with owner financing that are successful typically have buyers that are putting down at least 65% to 80% in the deal as a down payment. In most cases if a buyer is not able to put down at least 50% percent of the purchase price down at closing the deal is not able to make it to closing. Sellers want a large amount of money down because they want to know that buyers are committed to working the business. They also want to know that the buyer will be able to generate enough profit from the business to pay off the note and earn money simultaneously. When a seller receives a large down payment, they are assured that the buyer has incentive not to walk away. Last week, we had a buyer call on a business with a net of $200,000 a year to the owner. The business was priced at $300,000. It’s was a great price for a business for sale in the Orlando area. The buyer who called fully expected that the seller would be open to their offer of $50,000 down. While anything is possible and it is always good to ask, buyers need to put themselves in seller’s shoes when they make these requests. When we asked this particular buyer if they would take that deal if they were the seller, they admitted that they would not take it. So keep in mind if you’re a buyer looking for owner financing in a business purchase, you will have a much better chance of getting an accepted offer if it is an offer that you yourself would agree to.
3) We can get a business loan without going through SBA (Small Business Administration).
Obtaining a business loan from a bank without it passing through SBA is tough and typically is not an option for most buyers. Buyers that obtain commercial loans through banks for business purchases typically have a lot of collateral to back up those loans. The same type of collateral applies for home-equity loans. If the home a buyer is using for collateral does not back up the home-equity loan, then the financing deal will not go forward. Many buyers want to avoid going through an SBA loan because they are expensive, time-consuming, and SBA lenders are very strict on receiving every small detail funding a loan. However, in most cases SBA backed lender is unavoidable as any business loan where collateral does not cover for the loan 100% will typically have to pass under the SBA regulations. In addition, it is important for buyers to know that the SBA themselves does not finance the business loans, they are simply the regulatory agency that every bank has to go through in order to get them.
4) I have good credit, years of experience, and I’ve bought and sold businesses in the past so a bank and the SBA will finance any business purchase I bring to them.
No matter how seasoned a business owner is, some businesses simply will not qualify for a bank loan. In fact it would be impossible to even generalize that banks would finance most available businesses for a buyer because the lending process is done on a case by case basis. For example, many banks will not finance certain industries such as restaurants, manufacturing, and or high-tech business purchases unless a buyer has or can demonstrate past experience in those industries for a number of years. In addition to buyer requirements, the SBA and banks would not classify and approve the cash and personal deductions that a lot of businesses owners make while they own a business. Businesses priced under $300,000 especially tend to have personal deductions and take cash under the table. The banks and the SBA would not factor these elements into the loan approval process. The bottom line is that a large majority of businesses for sale in the Orlando and Florida market will not qualify with a lender regardless of the buyer’s qualifications.
5) My family member (Uncle, Father, Grandma, Sister), mystery investor, or extremely wealthy close friend will give me the money for the business purchase.
Both business brokers and business owners hear this from buyers constantly. However when asked what the buyer’s investors would require from each purchase before making the decision to loan the money, most of these buyers can only offer blank stares and in most cases have not even seriously discussed a business purchase with their so-called investors. The reality is that most buyers claiming to have mystery financial investors don’t even get close to the finish line of completing a transaction. In order for deals with investors to work is for the investors to be involved from the beginning in the entire process. They attend all the buyer and seller meetings, they are fully prepared to sign a lease for the business premises if required, and they and the buyer managing the communications between the investors is fully aware of what their requirements are and what it will take to fulfill them. So if you’re a buyer and you are counting on an investor to fund your business purchase, make sure they are on board with your plan and make sure you find out what their requirements are before searching for business opportunities. You will not only save the business owner’s and business broker’s time, but you will save yourself a ton of time. On most businesses we require not only a nondisclosure but a financial statement. If the buyer calling is not the one funding the business, we many times ask for a nondisclosure and financial statement from the one that is. The buyers with real investors can always provide that information for us.
6) Banks will finance any size purchase for me.
When banks lend business buyers money, they are looking to do so with the goal of making money as well. This means that the loan amounts need to be high enough to be worth the banks while. If buyers speak with legit and professional SBA bank lenders they will find that deals priced at $100,000 simply cannot qualify for financing. For the really good SBA lenders to work on a deal, they typically need it to be selling for closing to $200,000 to $250,000 as a minimum before they start to work on a deal. There are also limits for the more expensive businesses as well. SBA in most cases unless there is real estate will not approve deals valued at more than $2 Million. Those deals are typically financed using other methods.
7) If I can take a look at the business, I’ll be able to find the money to purchase it.
There are many reasons why Business Brokers and Sellers don’t want unqualified buyers looking at their business. Every time we have a buyer sign an NDA and they are given a package, a seller does run a risk of that buyer not being discrete and allowing their competitors, employees, or the general public to know that business is for sale. In addition, the Seller doesn’t want a buyer going around town trying to find investors and disclosing the details of the business to individuals who have not signed the NDA. Sellers want to meet buyers who are ready to move forward. It is difficult to sell a business and even more difficult to wait for a buyer who has to “find” the money in order to move forward. It is always best that a buyer understands their true financial situation. If a buyer has an investor, they really need to speak with them about buying a business and have them accompany them to all the meetings. If you had $1,000,000 just laying around and someone you knew wanted to buy a business, would you give it to them with no knowledge of what they plan on purchasing with it? Would you just allow this person who has never owned a business to take your $1,000,000 and make all of the decisions? The answer is probably not. This is precisely why sellers don’t want to meet with unqualified buyers. Those buyers aren’t the ones making the decisions, it is always the investor.