Be patient. Finding a business to acquire is not a quick and simple process. The first thing we advise potential buyers to do is to give some serious thought to what they “want” in a business vs. what they “require” in a business – then make a list for each category and prioritize your responses. Try to stay general in your terms – if you are looking for a flooring manufacturer with $500,000 cash flow within 10 miles of your home, you may never buy a business. However, if you set out searching for a manufacturing operation with a cash flow range of $250,000 to $750,000 in your surrounding counties, you will most likely have multiple options to consider.
There are really two possible questions here – how much can you afford to put down and how much can you afford in monthly payments? The down payment decision is really a function of what you are able and willing to invest in the business, but the monthly payment decision is a bit more complicated. As a general rule, we advise buyers to analyze their cash requirements – what does it take for you to live the lifestyle you are either accustomed to or are willing to accept? Once you have that figure and feel good about it, you can back into a rough business value that’s the right fit for you by calculating debt service. For example, if you purchased a $1MM business with an SBA loan at 6% for 10 years and put 25% cash down, you would be paying roughly $100,000 in note payments annually. If you determined your annual living expense requirement is $200,000, then you should be looking for SBA qualified businesses priced around $1MM with a minimum $300,000 cash flow.
There are primarily two ways to finance an acquisition we see more than any others – SBA 7(a) loans and seller financing. Of course there are dozens of other financing alternatives, but these two account for the lion’s share of deals priced up to $5MM. Typical SBA terms require 25% cash down and terms of 5% to 7.5% for 10 years. Seller financing is an entirely different story – there really are no guidelines because the terms begin and end with what a seller is willing to agree to. As a general rule, when seller financing is the best option for a deal, we will see down payments between 35% and 65%, annual rates from 8% to 10% and terms from 36 to 60 months. The advantages of an SBA loan compared to seller financing are the low down payment and low interest rate, while the advantages of seller financing vs. SBA loans are the shorter term and lack of a strenuous and difficult approval process.
We never like the word “all” or “every,” so the easy answer is no. With that said, you would be hard-pressed to find a bank that would tell you they don’t offer business acquisition financing if you asked them. Truth is, almost every bank has some sort of loan program for this purpose, but when you dig into their specialties and see the types of loans banks really do, there are significantly fewer that truly understand business acquisition financing and practice it as a core part of the banking model. Many times you’ll find that the seller’s representative has pre-arranged financing for the deal, so that is a good place to start when looking for financing options.
At some point in the process, you should expect to execute some sort of non-disclosure or confidentiality agreement on every business you inquire about. If you are not being asked to do so you are probably not dealing with a reputable company representing the business. Our approach to information dissemination is simple – we believe buyers need enough general information to determine if the business fits their basic purchase criteria – industry, cash flow, purchase price, basic financing terms and general location. Beyond that, you should have to execute an NDA to dig any deeper into the business. You should expect to get this request after your initial inquiry into the business.
As described above, prior to signing the NDA you should already know the basics about a business, such as industry, cash flow, purchase price, proposed financing terms and general location. After executing the NDA, you should gain access to historical financial statements and a much more detailed narrative on the business operation, including information on staffing, facilities, marketing, customer types, assets included, etc. In some cases you will also be given the business’ name and location at this time, while other offices will require you to provide some sort of proof of funds to demonstrate your ability to buy the business before disclosing anything further.
As we’ve all heard, everything is negotiable. We always suggest an analytical approach to negotiating price. If you’re going to offer less than the asking price, have a reason that you can back up with real numbers. It doesn’t hurt to ask the seller’s agent how the business value was derived – that’s a good place to start. Then do your own valuation analysis (which we offer buyers, by the way) and see where you come in as compared to the asking price. If you can make a thoughtful offer based on factual data and accepted valuation techniques, you will have a much better chance getting your number than if you simply made a low offer “because no one expects to get their asking price.”
When Should I Be Able To Meet The Owner And Visit The Business Location?
Once you have inquired into a business, signed an NDA, reviewed the provided materials on the company, provided your own qualifications and a personal financial statement and met with the seller’s agent, the next step is to meet the seller. Keep in mind that you need to work around the seller’s schedule for this meeting – in many cases they will want to meet well before or after business owners, and sometimes they do not want to meet at their facility at all, for confidentiality reasons.