How to Buy a Business
Who Does the Broker Represent in a Sale?
A common mistake that buyers make is to assume that a business broker either represents their interests or is neutral at the very least.The truth is that if you contact a broker about one of his listings, he represents the best interests of the seller. Indeed he is legally obligated to do so.Keep this in mind when dealing with brokers and keep your cards close to your chest. Anything you reveal about your weaknesses as a buyer will be used to screen you out as a serious candidate.
How to Buy a Business: Seller Financing
Should the owner help me buy his company by providing seller financing and how much should it be?
Yes, the seller should provide seller financing. In fact, seller financing is an absolute must when it comes to buying a business–especially a small one. Almost no individual buyer has the cash to purchase a business outright. So it becomes imperative for the seller to provide financing help. This is achieved by the seller taking an IOU note from the buyer which is to be paid off in anywhere from 3 to 10 years on average. The really small stuff is paid off in three years or less: pizza parlors, shoe repair shops, coffee shops, etc. Seller notes on bigger businesses will take 5 to to 10 years to pay off.
As to how much the seller should be willing to finance, the range can be anywhere from 66% to 80% or more. It all comes down to the particular transaction and the needs and abilities of both seller and buyer.
If a seller isn’t willing to provide financing, all that I can say is, run Forrest, run! An unwillingness to do this is a bad sign, one which should set off a lot of alarms. My first suspicion would be that the seller is not disclosing material information about something that’s likely to kill the business within months of the sale, so he just wants all of his money so that he can bolt to another state.
Am I being overly suspicious here?
No.
Never buy a small business without seller financing unless you’re Warren Buffet.
Can You Buy a Business With No Money Down?
As a business broker I was asked this question practically every week:
The answer is yes and no depending on how you define “buy a business with no money down.” Specifically, it all comes down to whether or not the seller walks away at closing with a down payment.
If you believe that a seller will hand you the keys for nothing more than your IOU Note, you’re in for a big disappointment. On the other hand, if you’re more sophisticated and understand the ways in which you can use the company’s assets to finance your down payment, you will may be able to work out a deal where your personally don’t put any money down but the seller still walks away with a down payment.
If you really know what you’re doing you will use the 75/25 strategy for acquisitions of small businesses. This means that you cut a deal where the seller takes back a note for 75% of the price and you use the business’s cash flow and assets to create the 25% down payment.
So, yes it is possible so long as the seller gets something reasonable at closing like a 25% down payment on the total selling price.
No one says that down payment has to come out of your pocket.
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