When buying an existing business, you have a lot of decisions to make. One of the most critical is how to finance the purchase. Fortunately, as seen in the recent post, Buying a Small Business: 12 Factors to Consider, there are plenty of options available.
While the options might be there, it can still be a challenge to find the funding to buy an existing business. Why? Credit markets remain tight and commercial lenders still have not been as welcoming to small businesses as many would like.
There are, however, advantages for existing business purchases versus a start-up venture. With an existing business, there is an established track record, with demonstrable results regarding the business cash flow, financial statements, and tax records. This documentation is critical and gives those looking to buy an existing business a leg up on the competition for dollars. In addition, an existing business will have a proven customer base, product insights, and brand recognition, as opposed to a start-up (non-franchise) business. Even if the business is a franchise, funding may be difficult for first-time franchisees, who do not have a proven track record.
Here is a closer look at the most common existing-business funding options.
If you have considerable liquid assets available, then you may be able to self-fund your business purchase. You retain control of the business and will not be indebted to lenders. You also will not need to give up a stake in the company to venture capitalists or partners. If you are one of the fortunate who has ample funding for a business, you may want to consider the Benetrends Rainmaker Advantage Plan®, a corporate capitalization strategy, that has the ability for 100% of the gain on the sale of a company to be 100% tax-free.
Venture capital investors will put up the funds to finance the business in return for an ownership share in the company. Note that most VC investors are looking to invest in high-growth companies and have a longer investment horizon than traditional lenders. These investors will want at least one seat on your board of directors and will usually play a hands-on role in the management and growth of the company.
Crowdfunding platforms leverage the best of social media to tell a story and gain followers. Under crowdfunding, you make a pitch for people – usually starting with friends and family – to draw support. Usually, crowdfunding participants give away small gifts for different levels of investment – a t-shirt for $100, a personal thank-you video for $250, and so on.
There is little to no risk to the business owner to pursue crowdfunding as an option.
Many lenders offer specific programs to assist small-business owners with financing their business. The U.S. Small Business Administration also administers several programs to assist entrepreneurs, with specialized programs for women-, minority-, and veteran-owned businesses.
Sellers who have a high incentive for selling will often finance a portion of the sale themselves. In most cases, the seller takes a portion of the agreed-upon price in cash and the remainder in a promissory note. The buyer agrees in the note to pay a portion of the note, with interest, usually over three to five years.
Benetrends pioneered an innovative approach to financing a business. With Benetrends, business owners convert existing 401(k) or IRA funds into needed cash to purchase an existing business. The funds are available tax-deferred and penalty-free. To learn more about how Benetrends can help you purchase an existing business, schedule a consultation.