How To: Price and Finance a Business Purchase

• Depending on the kind of money you need to borrow, you can attempt borrowing from friends and family members or even angel investors.
• You might even consider your options in rolling over your personal 401(K) plan to finance your purchase without taking a tax hit, says Itamar Chalif, founder of Atlantic Capital Solutions in Middleboro, Massachusetts.
• Once you have purchased the business, you might also be able to tap other sources of capital like factoring companies, which will lend you money against your AR, or even leasing companies which might be willing to buy any equipment you own and lease it back to you, which would generate an infusion of cash for the business.
• Once you have a track record, banks might also be willing to extend you a line of credit.

Sidebar: Spotlight on SBA Financing

These days, given the economy, Tom Burke, senior vice president of SBA lending at Wells Fargo, the nation's largest lender of SBA-backed loans, says he's surprised his bank isn't getting more calls from prospective buyers. "We have a lot of money to lend, but we're seeing some reticence on the part of borrowers," he says. "This is the time people should be looking for government-backed loans."

Here are three tips on how to land an SBA loan of your own:

• Have a business plan. One that includes at least three years of projections. Burke says that it's imperative that you have a plan that outlines why you are planning on buying a business and how you plan to grow it. "While we don't expect you to be a whiz about the numbers right off the bat, be prepared to talk about everything from your marketing plan to which of your family members will be working in the business," he says.
• Clean up your personal credit. Burke suggests that every potential borrower get a copy of their credit report and make sure it's correct. "In today's environment, clean personal credit is an issue when it comes to SBA loans," he says.
• Be prepared to make a down payment. To land a loan from Wells Fargo, Burke says borrowers should be prepared to make a down payment of 15 percent to 20 percent of the selling price. He says this is an area where seller financing is playing a greater role these days.

 

Negotiating the Price

While you pursue your financing, you and the seller obviously need to come to a mutually agreeable price if you want to move forward and purchase a business. If you've become stuck, your accountant can lend you a hand by helping you understand how much you can actually afford to pay for the business after you account for your debt service and working capital requirements. Here are several factors to keep in mind:

• It's useful to consider who you are negotiating with. Most sellers are of the mindset that, no matter what kind of business they put up foe sale, they will think it's worth more than it actually is, particularly if there is an emotional attachment to this business. If the seller founded the business or it has been a part of his or her family, you as the buyer might find it more difficult to agree on a price. Sellers might also have their own debt to account for, which can have a significant impact on driving up the asking price, says Chad Simmons, author of the Business Valuation Bluebook.
• Protect yourself from the potential pitfalls from a down economy. One way to accomplish that is to tie part of the purchase price to future earnings. These are called performance-based deals or earn outs. Not only does this build some insurance for you as the buyer in case short-term sales take a dip, it also puts the seller in the spot in terms of putting their money where their mouth is. If the business is as great as they say it is, the seller should be willing to bend on this part of the offer, especially if you are at an impasse in the negotiation.
• Be aware of potential complications in negotiations.Sometimes, the back-and-forth of negotiating a price can get complicated for unexpected reasons. For example, back in March 2007, Brian Douglas was close to finalizing a deal to buy a customer cabinet manufacturer based in Los Angeles. Douglas says he spent several months searching for the right opportunity and he was excited about the potential of this one -- which had a strong reputation with home contractors and an Earnings before Interest, Taxes, Depreciation and Amortization (EBIDTA) of about $5 million. The rub was that the company's founder, a master Argentinean craftsman, had recently passed away. That meant that Douglas was negotiating with the founder's widow, who had an emotional attachment to the business her husband had built from scratch. After several months, and five plane trips for Douglas, the deal fell apart because he wasn't willing to pay the asking price and the seller didn't want any kind of a performance-based earn out. "In the end, I thought the asking price was too risky for us to accept," he says.
• Build in conditions to break an impasse.The best advice as breaking an impasse, says Peter Berg, of Transworld Business Brokers in Florida, is to make an offer through a letter of intent (LOI) that is contingent on the seller proving that what they say about the business is true. In other words, build in conditions to your offer that would allow you, as you uncover aspects that make you uncomfortable, to reduce the price or bail out of the deal altogether. If the business stands up to the scrutiny you'll give it during the due diligence phase that comes next, the price will stand. One thing to remember, however, is that under no circumstances should you ever pay the seller any cash prior to the final close. As a show of good faith, you can put a deposit of 10 percent of the selling price into an escrow account instead.