How to Buy and Finance a Business

Jessica SarterCommercial Lending

For sale sold sign

For sale sold sign How to sell a small business at the highest price was my topic in last week’s blog. The flip side is how to buy the business that’s right for you. And equally as important is how to get the best acquisition financing. Your negotiating power is compromised when you don’t know where your financing is coming from.

You may only buy a business once in a lifetime. Therefore understanding a little about the pricing, buying and financing process will be critical to making the right offer and closing the deal.

Be aware that valuing a business is not an exact science. In fact experienced business appraisers often disagree on what a business is worth. Some appraisers would prefer a range of values rather than chasing an elusive number. Unfortunately though, offering a range of values rarely satisfies buyers, sellers or lenders.

According to the Institute of Business Appraisers Inc., market value is the price at which a business would change hands between a hypothetical willing-and-able buyer and hypothetical willing-and-able seller, acting at arm’s length in an open and unrestricted market.

But the definition of market value is problematic because small business buyers, sellers and businesses are unique and it’s difficult to emulate the hypothetical transaction cited by appraisal academia in the real world marketplace. Additionally, appraisers evaluate businesses free and clear of debt. But businesses are often purchased with some debt already in place.

Furthermore, seller financing is frequently part of the sale and it increases the price that buyers are willing to pay. Consequently market value and the price at which businesses are acquired may differ greatly. So rather than basing your decision on appraised market value, focus on the current cash flow and what the business is worth to you.

For very small businesses, you may be buying little more than a job — an alternative to working for an employer. By comparison, for businesses over $1 million, you are buying the current cash on cash return and the likelihood that the overall return on investment will increase under your ownership. Sophisticated small business investors buy the internal rate of return, ROI calculated by the discounted future cash flow.

When you target a candidate acquisition, assemble the documents needed for your due diligence and to determine the historical cash flow. A business acquisition lawyer or accountant can provide you with a checklist of documents to gather from the seller. You will need a legal and tax professional to help structure your offer so you might as well get them engaged early in the acquisition process.

Unless you intend to buy the business for all cash, you need to know where your acquisition financing is coming from. Some sellers will finance a substantial amount of the transaction if you pay the full asking price. But getting a bank loan instead gives you more power to negotiate a lower price.

Not asking for seller financing may also boost your negotiating stature enough to get more favorable tax-advantaged structuring and a tighter warrantees, representations and indemnification agreement from the seller. That is important if the seller leaves behind undisclosed threatened lawsuits, debt and potential liens. The agreement holds the seller responsible after the closing.

To begin your search for financing, check out BoeFly’s Business Fundability App. It will let you know how many of BoeFly’s lenders will likely have an interest in financing your acquisition. Using the app is quick, easy and free. It zeros in on the information previously posted by BoeFly’s over 2,200 lenders.

The app will ask for the state in which the business is located, for example. That alerts banks interested in lending in your region. The App also wants to know how much money you need and how quickly you want to have it in your hands. Thirty-day settlements are possible since lenders and their closing departments can download all the documents they need from BoeFly’s secure and confidential web site. Of course entering your estimated credit score and a few more details narrows down lender interest to greater certainty.

Mike Handelsman, the general manager of BizBuySell.com, says that the Great Recession has kept business owners from putting their companies on the market. They “delayed plans to exit their businesses and retire.” He observes that they have been waiting on the sidelines and are beginning to make their move to sell out.

Businesses and back on the market and their owners are pricing them to sell. It is a buyer’s. Moreover, understanding the buying process and knowing where to get financing, positions you to negotiate the best deal.

 

Jerry ChautinJerry Chautin is a former entrepreneur, commercial mortgage banker and business lender. He writes and blogs about business and real estate for several publications and is SBA’s 2006 national “Journalist of the Year.” Jerry is a volunteer business mentor with SCORE, “Mentors to America’s Small Business,” offering free business advice. Post your comments and ask questions on this Blog or send Jerry an e-mail.

 

Copyright © 2012 Jerry Chautin — All rights reserved.