Tips When Buying A Business
Are you learning about Buying a Business? For most people, buying an existing business is a better option than starting one from scratch.
Buying an already operating business has an existing cash flow, established customer base, vendor relationships, trained employees, and an established business location.
All of these critical factors are non existent with starting a business from scratch. It will take time and a lot of hard work just to get a new business of the ground. In addition you will be literally burning through cash the first year and it’s safe to say you should have at least 6 months to a year of personal savings in the bank that can cover your family's expenses while your new business is developing.
The choice is easy. Buy an existing business with a proven cash flow so you have immediate income.
Financing a Business
Financing an existing business can be time consuming but it depends on the route you go. Most small business owners will carry owner financing on a percentage of the deal. So if the total deal price is $100,000, you may only need $20,000 - $40,000 as a down payment and the sellers may carry the balance. Most sellers will carry the loan for 5 years at 6% -7% interest. They may also allow you to finance the loan over 10 years but require a balloon payment in 5.
You should always try and get the seller to carry a portion of the financing fist. It’s the easiest method in getting a deal done. If the seller will not carry a large enough portion with your down payment then you can look at alternative financing.
So how much do I need as a down payment? You should have 5% - 20% of the total purchase price as your down payment. For seller financed notes they may require up to 50% down but this will vary widely with each deal and sellers personal requirements.
It is a common misconception with Small Business Loans (SBA) on how easy they are to get. First and foremost, there is no such thing as No Money Down Loans when it comes to buying a business. Even before the credit crisis they did not exist. You will need at minimum 10% of the total purchase price as a down payment to get bank financing. Most small business lenders will not loan on purchases under $100,000 - $150,000 and they have additional requirements.
Personal Requirements in Financing:
10% Liquid Assets as down payment (They will prefer 20%)
At least 6 months experience working in a similar business or managing another business
A good credit score 620 and above minimum and no recent bankruptcy
Business Requirements in Financing:
The business will need to provide at least 2 of the most recent tax returns and the current years updated Profit and Loss statement.
The business will need to show it has sufficient provable cash flow after the loan debt service and the buyers personal financial requirements.
If you do not meet all 3 of the personal requirements and the business does not meet it’s requirements then you most likely will not receive an SBA loan and will probably be wasting your time. You should focus more of your time on either negotiating with the seller to carry the financing or find a different business.
There are a few other ways you can finance the business but it will require refinancing personal assets like real estate.
Look for a business that has some connection to types of work you've done in the past, classes
you've taken, or perhaps skills you've developed through a hobby. It's almost always a mistake to
buy a business you know little about, no matter how good it looks. Also, try to choose a business that you're excited by. It's easier to succeed in business when you enjoy the work you're doing.
Where to Look when finding an Existing Business For Sale
The first place you should look is contact a local Business Broker. Business Brokers are professional Business Advisors, intermediary's that assist buyers and sellers in the sale of a Business and generally are paid fees by the seller. A broker will help you in everything from researching businesses for sale, negotiating the best price for the business, financing the business, incorporating your business, and much more.
Although brokers are paid commission by the seller, their interest is in selling the business. Therefore a good broker will work with both the Buyer and Seller in negotiating the most favorable terms for both parties.
Brokers are one of the best resources to use when Buying an Existing Business.
You can find a Business Broker by looking in your local yellow pages or online by using business for sale websites like The Business Broker Journal Network of Websites. These sites are mainly a marketplace for business brokers and private sellers to leverage as a place to advertise their businesses for sale.
Using the Internet is one of the most efficient ways to search for a Business for sale. There are several websites that offer Businesses for sale however, the most effective and actively used sites are The Business Broker Journal and Business To Buy Network.
For More Information on SBA and other Business Financing Visit: http://www.sba.gov/community/discussion-boards/finance-options-solid-business-plan