Business Purchase

For the serious businessman or businesswoman, though - the entrepreneur in the truest form of the word - some little side business isn't going to be enough. You're going to have to run a full time, productive, legitimate business, and often the best way to do that is to buy one that's already proven itself in the business world. The only problem with business acquisition of this kind, of course, is that it requires business purchase financing - in other words, businesses are expensive and business financing is never easy.

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An Overview of Business Financing
The ideal solution, of course, would be to simply buy the business upfront with a wad of cash or a nice big check. The problem is that there are almost never ideal situations, especially if you’re a small business owner. Chances are you don’t have the cash on hand to afford to pay for the business you want to buy right up front – if you do, there’s you are one financial step ahead of many people looking to start a business.

Your only fallback option is business financing, which covers everything from bank loans to venture capital to seller equity, all of which we’ll be covering over the next few pages, so pay attention. Remember, this is just an overview piece, designed to give you a crucial first step on the road to financial success working under yourself as your own employer – if you really want to be successful in your new field and get the best possible deal on your business purchase financing, you’re going to have to do a whole lot of research on your own and, hopefully, get the best out of a varied and highly competitive market. Let’s start by looking at the basics.

Personal Equity in Business Purchase Financing
In any business acquisition of any size, personal equity will pay a vital role, so knowing what personal equity is in regard to business purchase financing is of course a vital first step in your new business acquisition. Personal equity is, simply put, the amount of money you can put up towards your new company yourself. As we said earlier, the ideal situation would be to simply pay for all of it – then you avoid the messy loans and paperwork that will follow the initial deal. As we also said earlier, there are almost no ideal situations, and you’re almost certainly going to need to get some other source of financing.

However, all of those other sources of financing are going to require you to take a fair bit of the burden – usually between 25% and 50% - on your own shoulders while they take some or all of the rest on theirs. It makes good business sense, as, after all, who would invest in a business where the person buying it isn’t willing to put in some money of his or her own? So you might as well take it for granted right up front – you’re definitely going to need a fair bit of money to buy your new business, especially if it’s a large one. Make sure you have some on hand and make sure you can afford to lose it in the event of a catastrophe.

Seller Equity in Business Purchase Financing
The second step which is a main one in many business acquisition deals is that of seller equity. This may seem a bit odd at first glance, but in reality is a very important factor to consider and, if you think about it, not all that different from so many other businesses. Seller equity is where the seller takes up a portion of the cost himself as a loan to the buyer in order to make it more certain that the deal goes through. The buyer than pays back the seller’s investment (at interest, of course) as the newly bought business begins to make money and produce profits for the new buyer.

If you think of this carefully, this is not a system unique to the world of business purchase financing. If you buy a car, for instance, or a large television set, you may get a “monthly payment” plan. If you think about it, that is exactly the same as the seller equity system in business financing; instead of a payment of cash to the seller, you give the seller a note of debt. That way you don’t have to pay everything right up front, and the seller makes more in the long run. Many loan companies may require seller equity as part of the deal, especially if you as the buyer can’t afford to front a large amount of buyer equity yourself.

Standard Loans
Once you have enough up-front cash acquired through both buyer equity and seller equity, you can think about applying for a loan. There are lending houses galore out there in today’s business world, and banks are always great places to check for loan options, especially if you have a fairly surefire business plan. That’s an important part of business financing – make sure you have a business plan, and can demonstrate to your lenders exactly how you intend to make money in the new business. If the business was profitable before you bought it, there’s a good chance it will be afterwards, which will help your case with your lenders – you will, however, have to convince the lenders that you will do as good or better a job at running the new company as did the last owner.

The problem is that banks and many lending houses are very much “safe investment” sorts of solutions. What that means in the real world is that in your business acquisition you only have, statistically speaking, a one in five chance at getting a serious loan from a bank or lending house – in other words, if your proposed business acquisition promises to be a very stable and dependable investment for the sort of deals businessmen and businesswomen make when dealing with other people’s money. If you can’t get a bank loan for your bank acquisition, you may have to go out and look for other means of business financing.

Venture Capitalists
For the business plans that are more “out there” – the new ideas, the old business poorly run you think you can improve, the businesses with niche markets you think you’ll be able to reach where no one else ever could – the sort of businesses, in short, where you know you have a shot and everyone else doubts you – you’re going to have to be creative in your business purchase financing, and that often means going to venture capitalists for help.

Venture capitalists are those wealthy souls who see potential and give money to it an attempt to make it big, fast. Venture capitalists have been behind some of the biggest and most ambitious private projects in history, including the recent launch of the first ever privately owned spacecraft, Spaceship One, in an unprecedented demonstration that the space industry is beginning to shift from government to corporate hands.

Business Financing, Venture Capitalists and Considerations
The problem is that these daring businessmen and businesswomen are not fools – far from it. They’re willing to take a risk, yes, and sometimes major risks, but always calculated risks. You’re going to need a good plan more than ever and you’re going to have to sell your plan to the people with the money – think of it as a scale model of what you’ll be doing when your business acquisition finally goes through and you’re selling your product or service to the public with the money and your venture capitalists are getting rich off of your success.

Because venture capitalists are dealing in larger risks and bigger gambles and are money-wise, they will often try to hedge their bets against possible loss by foolish business owners. Unfortunately, that means spreading the loss of a few failures over the investments as a whole, and that means high interest rates as well as something called “majority control” – venture capitalists are not giving you loans, they’re buying into the company. That gives them some limited control over what you can or cannot do with your company. It is for this reason that many business owners try to get help from other quarters before going to venture capitalists for funding.

The Small Business Administration (SBA)
The United States government knows how difficult it is for small businessmen and businesswomen to acquire their small businesses in this extremely competitive world of mega corporations, and has stepped in to help. Using an entity called the U. S. Small Business Administration (SBA) Loan Guarantee Program, the government can help offer favorable terms and loans to small business owners looking at business acquisition options and requiring help with their business financing.

Just because it’s a government program, though, doesn’t mean that getting an SBA loan is a surefire trick. The government may be willing to loan money to those that qualify, but this particular branch of it is going expect that the applicant meet rigorous demands; you’re going to need a great business plan and a gift for convincing people you’ve got something with what you intend to do and buy. However, SBA loans are far easier to acquire than standard bank loans and far less controlling than venture capital investments. It especially helps your case if you have seller equity on your side as a demonstration that the seller trusts the buyer to run his or her business at enough of a profit to pay the seller back at some later date.

Help With Your Business Financing
There are countless financing options and companies out there to help you if you’d rather not struggle through this process on your own. Feel free to hire an accountant – it could save you a lot of trouble, a lot of sleep, and potentially a lot of money in the long run. Having a financing company help you with your business purchase financing may mean, despite initial fees and percentages, a greater level of profit and a far more favorable loan in the long run, so it’s definitely something to consider.

Goodwill and How to Plan For It
Goodwill, you might say? Why would you have to plan for goodwill? Well, in the small business and business acquisition world, goodwill means something a bit different than the more common interpretation of a word. See, every company is worth something very specific in terms of material wealth. Business property, real estate, and employee structure are all things that can be estimated by appraisers. But, as they say, the whole is more than the sum of its parts; particularly profitable business are going to make their buyers a lot more money than they pay for it, and the sellers know that, and the sellers know that the buyers know it too.

As a result, the sellers often hike the price tag. Price goes up past the initial appraisal estimate, and the difference is known in the business as goodwill. Keep that in mind when you buy your business, as many lending institutions refuse to cover goodwill as part of the loan. Knowing the total cost of the business and how much of it is due to profits is vital in your new business acquisition: best of luck.


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