How to buy and finance an existing business (credit, lending, borrow)
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When it comes to a lot of things involving finance I feel I am very savvy but I came across this question above and became interested.
If an individual wanted to buy an existing business how would they get the capital to finance the purchase? Let’s say the business costs 3.3 million dollars and the company currently makes 800k a year and has 20 part time employees.
To get a loan to purchase the business, would a bank loan that amount of money without putting up substantial assets as collateral if you submitted a professional business plan and the bank doesn’t see the loan as very risky ? Would a loan of this size be more or less a private deal giving up equity to an investor that believes in you and the business.
I know there are multiple layers to this answer and I don’t have the details since I made up this hypothetical scenario but I was just curious how you buy something that costs in the 1-5 million range. Most people don’t have anywhere near that amount of liquid capital to invest in a business and if they did say have a million dollar home free and clear it wouldn’t seem wise to attach personal assets to the business. That’s usually the point of an LLC so you won’t lose personal assets if the business fails. On the other side, a bank would have a ton of risk for a loan that size with no collateral.
If an individual wanted to buy an existing business how would they get the capital to finance the purchase? Let’s say the business costs 3.3 million dollars
If an individual wanted to buy an existing business how would they get the capital to finance the purchase? Let’s say the business costs 3.3 million dollars and the company currently makes 800k a year and has 20 part time employees.
To get a loan to purchase the business, would a bank loan that amount of money without putting up substantial assets as collateral if you submitted a professional business plan and the bank doesn’t see the loan as very risky ? Would a loan of this size be more or less a private deal giving up equity to an investor that believes in you and the business.
Assuming your referring to just an operating businesses only with no real estate for sale, a bank would want to know how the business financial history is first and foremost. Tax returns, profit/loss statements, inventory involved, etc. If it’s losing a lot of revenue every year, probably won’t be approved for a loan. Many businesses are purchased by more than one investor that don’t need outside financing.
Its very unlikely a bank would loan. The business would have to have a sterling track record and the buyer would have to have excellent credit and experience in that field and the buyer would have to be personally responsible for the loan. The business would have to own hard assets that could be sold off to settle debt if necessary,
Often the smaller business are sold with the seller carrying the loan himself. For the really big business, money comes from the stock market or private investors.
For Johnny Nobody trying to buy a small business with bank financing, it is very unlikely to happen.
Honestly, to start, it's a friends, family and colleague hustle...and it should not be taken lightly. Do you know your trade in/out? What don't you know. i.e. I'm a great mechanic that wants to buy a shop, but I don't know labor law, finance and marketing. Be upfront about what you don't know and reach out not just for money but for help. Fill in the gaps as to how things will work. People that buy existing businesses need to realize all the good employees will run away if you don't know your stuff and you'll be left with the garbage employees.
You need to sell yourself to your investors. You need to sell yourself to your employees. You need to sell yourself to the customers and suppliers.
It's all the same pitch. What will your takeover look like.
To get a loan to purchase the business, would a bank loan that amount of money without putting up substantial assets as collateral if you submitted a professional business plan and the bank doesn’t see the loan as very risky ? Would a loan of this size be more or less a private deal giving up equity to an investor that believes in you and the business.
Not a chance. No bank would touch such a deal. What you're proposing amounts to asking someone to take on all the risk but not reap any of the rewards if it's successful. You have to bring your own funds to the table or get seller financing.
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^^^^. (not a chance). On $800k potential annual revenue for $3.3 m capital cost.
Banks only take secure bets. (At a very high cost to borrower) with 100% chance of recovering their dough if there is a business failure. (Personal guarantee). Do you have demonstrated success in this specific business enterprise? The bank will ask that, up front.
Go visit your Local SCORE or SBDC (free services for small business). Bring audited data on cash flows and expenses (including operating and lending costs). They'll get you pointed in the right direction.
Self employment/ private business owner #101.
Never use your personal shelter, or designated funds (retirement, college, emergency fund) to as collateral for business obligations. Stuff happens, very unexpected stuff! Multiply that risk by each employee (20x in this case). 100x if your personal contribution is required to sustain daily operations
Last edited by StealthRabbit; 05-28-2023 at 02:50 AM..
^^^^. (not a chance). On $800k potential annual revenue for $3.3 m capital cost.
Banks only take secure bets. (At a very high cost to borrower) with 100% chance of recovering their dough if there is a business failure. (Personal guarantee). Do you have demonstrated success in this specific business enterprise? The bank will ask that, up front.
Go visit your Local SCORE or SBDC (free services for small business). Bring audited data on cash flows and expenses (including operating and lending costs). They'll get you pointed in the right direction.
Self employment/ private business owner #101.
Never use your personal shelter, or designated funds (retirement, college, emergency fund) to as collateral for business obligations. Stuff happens, very unexpected stuff! Multiply that risk by each employee (20x in this case). 100x if your personal contribution is required to sustain daily operations
I would add that as a business owner selling their business, do not finance any more of the purchase price than you're willing to lose. If the buyer becomes unable to make their payments chances are high that it's because the business is declining. By the time the old owner retakes control after buyer's default there's a strong likelihood that the business has been destroyed beyond rescue.
I remember when a thriving local business was sold in my town (real estate not included) and the owner financed the sale and rented the property back to the new owner. Well, new guy systematically destroyed the business through poor practices and didn't pay the rent for months leading up to defaulting on the loan for the business. The old owner was reluctant to evict because then he'd be assured of the business failing so he let it drag on for far too long and in the end wound up with a vacant commercial property and a business beyond rescue that was effectively worth zero. The sale of the business and income from the rent was his entire retirement plan. Retirement completely destroyed because of the decision to finance the sale of the business.
Tl;dr: Don't finance the sale of your small business.
I would add that as a business owner selling their business, do not finance any more of the purchase price than you're willing to lose. If the buyer becomes unable to make their payments chances are high that it's because the business is declining. By the time the old owner retakes control after buyer's default there's a strong likelihood that the business has been destroyed beyond rescue.
I remember when a thriving local business was sold in my town (real estate not included) and the owner financed the sale and rented the property back to the new owner. Well, new guy systematically destroyed the business through poor practices and didn't pay the rent for months leading up to defaulting on the loan for the business. The old owner was reluctant to evict because then he'd be assured of the business failing so he let it drag on for far too long and in the end wound up with a vacant commercial property and a business beyond rescue that was effectively worth zero. The sale of the business and income from the rent was his entire retirement plan. Retirement completely destroyed because of the decision to finance the sale of the business.
Tl;dr: Don't finance the sale of your small business.
Such a good point. We will hopefully put our business up for sale in the next 5 years.
We purchased a complementary small business in December 2019 and the owner did not want to finance any of it, so we scrambled to get the funds together. She was so smart, Covid shutdowns happened weeks later. You just never know what may happen.
When I sold my business my broker advised me not to consider any owner-financing offer and I took his advice, thankfully. The new owner kept my previously prosperous business afloat for about four years before closing the doors losing everything.
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