So you’ve found that perfect restaurant to acquire now, all you have to do is finance it. Financing the purchase of a business whether an existing business or a start up is such an important part, that understanding your options can be the difference between getting the business of your dreams or not. We will cover the whole spectrum here, from conventional to downright creative.
Conventional Financing
Usually 3 – 5 years (business only) 15 year w/real estate, 30 – 40% down, typically a fixed rate of interest. Currently 7-9% interest/not likely to get done in this business environment for a restaurant
Small Business Administration (SBA) guaranteed financing.
This is where the action is currently as far as banking financing goes. New guidelines for up to 90% SBA 7a loan guarantee for a business acquisition loan up to $1.66mm. The SBA has also waived the guarantee fee, which can range 2-3.5% of the guarantee amount. Banks really like SBA loans because their downside is very limited by the guarantee. However, the qualification process can be difficult. For a start up you will need a good business plan, great credit 680+ fico score and relevant management experience in the business that you want to start. For acquisitions of existing business you will need to provide 3 years taxes from the seller with established cash flow, along with a business plan, credit and management experience. Not all SBA Lenders are the same you ideally want to work with a SBA preferred lender. They have in-house bankers that know the SBA guidelines and have authority to make their own decisions for loan approval.
Contract for Deed/Promissory Notes.
Otherwise know as “seller financing”. This is where the seller is the bank with typically 20-30% down with rates of 6-8% currently. The approval process is simple. Convince the seller that you have what it takes to make the business work, and make your payments. Along with this type of financing there is usually a “balloon” payment in 24 – 60 months. You have to pay the seller in full any remaining balance at that point. Usually a buyer will purchase on contract for deed and then refinance with a bank to pay off the former owner.
Employee Retirement Stock Option Plan (ERSOP).
This plan uses your 401K plan to purchase a business. Let’s say you’re 50 years old and just got laid off, you’ve got $300K in your retirement account but you can’t start pulling it out till age 62 or if you cash it in you will get hammered with 46% taxes on the money you pulled out. Here’s how it works, you start a C-Corporation, the corporation starts a retirement plan; the retirement plan purchases stock of the business that you want to acquire; there is no penalty on the funds that you pull out. There are of course some risks, if the business fails there goes your retirement funds. Also, C-Corps have more extensive reporting requirements than S-Corps or LLC’s.
Purchase a “Shelf Corporation”.
This is when you purchase an existing C-Corporation name with a paydex score of 80+ and has established credit lines already available, usually $100,000.00.
This will cost you $17,000.00 up front and will take 60 – 90 days to get the funds. The good part is that there is no personal guarantee on the funds and no personal credit check. The bad part is that you are basically paying 17% up front and whatever interest rates you have to pay on the credit lines (currently 4 – 14% averaging 7.9%) and payment of 1% of credit used per month. This can be an option if you are getting an outstanding deal on the business and are confident that you can cash flow the repayment.
Hard Money Lenders.
This is when you have private investors that will loan 50% of value of assets (usually with real estate) and charge 9 – 25% interest only with 5 years term.
Credit Cards.
I know of at least one buyer in the last 3 months that financed the start up of a bar and grill through credit cards. Got good credit? Order 6-8 credit cards with credit limits of $5-$30K each and you’re in business. Initial interest can be as low as 0-2.9% for the first six months; just make sure that you can pay off the balance or make sure you can make the payments. There are many stories of credit card companies and banks jumping up the rates to 23-27% interest.
Existing Business Financing.
Credit Card Advance. Owner can draw up to one month’s credit card sales in advance; pays back through credit card charges daily. Example; $1,000,000 annual sales 30% credit card and debit card, $300K x 12% equals $36K advanced, with interest rates between 17 – 23%.
Equipment leasing. Sell owned equipment to leasing companies with a 2 – 5 year payback. The better your credit the longer the term of the lease; interest rates range between
8 – 13%.
As you can see there are many finance options available, but keep in mind the golden rule, “He who has the gold usually makes the rules.
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