Financing the Small Business (Part 2 of 3)

Financing the Small Business (Part 2 of 3)

Yesterday’s posting addressed how financing is a major issue in the sale of businesses today and yet how the source of financing that has effectively dried up didn’t even exist not so many years ago.

So, where does that leave us?

If you don’t know what seller financing is, read on. If you think SBA loans will come back, read on. It used to be, and it is now, that if the seller really wants to sell, he or she is going to finance the sale. There is no outside money and the sooner you can get the small business owner to accept this, the sooner a lot more deals will be made. Sellers may not like it, but if they are serious about selling, the sooner their business will sell.

The buyer will have to come up with 30 to 40 percent as a down payment. The seller will carry the balance on terms that make sense for both. After making the payment to the seller and paying the costs of doing business, there has to be sufficient funds for the owner to feed his family. The ROI is what the new owner receives when he sells it.

The trade-off for both is that the buyer understands that the seller has sufficient confidence that the business can pay itself off and make a living for the buyer. This does help bridge that “leap of faith” required of the buyer.

So, on your next listing appointment, when the seller provides you with his or her price, you should then ask, “And how much of that are you willing to finance?” Get ready to “duck,” but understand that the seller has to finance or be ready to stay in the business forever.

One major plus is that by financing, the seller usually will get at least 10 percent plus more than if it were a cash sale, and that doesn’t even include interest. Those of you that put a value on the business can increase the figure by at least 10 percent if the seller is willing to finance 60 percent or more.

For many business brokers, the new rules of the game may be tough to deal with, but deal you must. For the old-timers, go back to what you used to do.

Tomorrow’s posting will address, “Where is the SBA Going?”