When developing a plan of finance to purchase a business, the smart buyer looks for money in a variety of places, rather than limiting himself to one or two sources. Multiple sources usually generate the largest available investment fund so the entrepreneur can acquire a high cash-flow business. And this balanced approach enables the investor to spread the risk. Among those possible sources are:
1). Personal savings represent the first place to look for money to invest in a business opportunity. Rather than cleaning out her account however, the buyer is advised to hang on to an emergency fund, using just some of what has been saved for the purchase.
2). Accessing retirement accounts can be the best way to use that money being set aside for the future. The 401k and IRA accounts the buyer has been investing in can be used as part of the finance to purchase a business strategy. The good news is that if done correctly, these funds can be converted to purchase money without incurring negative tax consequences. Consulting an expert in this area is critical.
3). Seller financing is an important source of money when purchasing a business. The seller’s willingness to help the buyer fund the deal demonstrates to other lenders that the current owner--the person who knows the business best--believes the buyer will be successful. And with “skin in the game,” the seller will be highly motivated to help the buyer achieve that success.
4). Bank financing is the next part in the strategy of finance to purchase a business. Business lenders, particularly those who are part of the SBA lending network, have been increasingly involved in funding business purchases over the past couple of years--ever since Congress made money available, through economic stimulus legislation, to help the SBA promote lending to small businesses with its loan guarantees and various incentives.
5) Vendor participation is a little used strategy that can be effective in helping to fund a business purchase. One approach is for suppliers currently working with the business being sold to agree that bills owed by the seller of the business can be assigned to the buyer for payment. The effect of this is to lower the down payment required, because the seller won’t need the money to pay off existing obligations before transferring the business.
The entrepreneur interesting in buying a company usually will be able to leverage into a larger enterprise if there are several funding sources included in the strategy of finance to purchase a business. Calling on business and loan brokers and tax specialists is advised to make these strategies work effectively.
About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan broker services with SBA Loans, Non-SBA Loans, Retirement Plan Conversions, Hard Money, Gap/Bridge Financing, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyouts. Peter Siegel can be reached direct toll free at 888-983-1632 regarding getting professionally pre-qualified, advisory & loan placement services.