Buying a business has many components and follows a specific process. One crucial component is establishing the necessary financing to accomplish the transaction.
Determining your lending capacity early on is equally important to you, the Buyer and to the Seller. Since many deals require the Seller to finance a portion of the sale as a secondary security to the primary lender, the Buyer needs to demonstrate a realistic and acceptable repayment plan.
Understanding your financial position before making an Offer on a business will greatly increase the success of a timely close. The number one cause of deals falling off the table is insufficient or inadequate funding. An educated buyer is the best buyer.
Here are a few sources of financing to consider early on:
- Buyer’s personal capital – It is an absolute must that the Buyer provides some of the capitol needed to purchase the business. 25% of total consideration is a good gauge to go by. Personal savings, home equity, love money from family and friends, these are general sources for personal capital.
- Seller financing or vendor take back – In most sales of operating businesses, the Seller will be required to finance a portion of the purchase price as a secondary lender. Many variables and circumstances come in to play to determine just how much a Seller will need to finance, including the Buyer’s financial position. Keep in mind the Seller will want to finance as little as possible.
- Commercial bank loans – The bank will always look at these considerations. 1. Is there Seller financing? 2. Is the Buyer a strong candidate to run the business? 3. What will the loan be used for and what is the track record of the business? 4. Collateral 5. What is the risk?
- Private Lenders – The BDC uses federal reserves to help stimulate economic growth in Canada. A great source of lending, the BDC will look at all of the same consideration as a commercial bank but will have a higher tolerance for risk and will be a more patient lender.
- Community Lenders – Community Futures is a community driven, non-profit organization that is guided by a volunteer Board of Directors. They are people focused and offer both financials and technical support.
- Venture Capitol – It is important to understand what venture capitalists are seeking: Equity and high returns. They can be an excellent partner for high risk businesses with potential for accelerated growth and profits.
There are often 2 or 3 sources of lending in a business aquisition. As a Buyer, it is in your best interest to shop around and compare your options. You can sometimes use them as leverage to get a better rate or better terms.
Here are some websites to get your started:
Lethbridge Community Futures
Canada Small Business Financing Program
List of Angel Investors and Venture Capitalists in Canada:
To learn more about types of lenders, contact Larkspur Business Brokers today.