6. Financing Options
As you come to a deeper understanding of the business acquisition process, it is important to discern between the financing options you can rely on in your endeavor. Each type of financing has a different approach for funding and paying off small business purchases, and each has its financial benefits for either the buyer or the seller. Therefore, the purchase terms of the final sale are a strong point of negotiation. It is suggested that a buyer should be ready to pay from 50% to 70% of the cash price and to finance the remaining amount.
Before agreeing to the payment approach and price allocation, it is important that you consult with reliable experts on the legal, financial, and tax implications of each.
Here is some general, but very important information on the different payment approaches and how each method may affect the buying process.
Cash Payoff at Closing
On the one hand, although this is quite unlikely, opting for an all-cash payment to finalize the transfer puts you in a favorable price negotiation position, as it shows that you are fully invested in the acquisition and limits the risks associated with loans or third-party financing. As opposed to installment payments to the seller, the cash payoff strategy keeps the seller’s post-transfer meddling to a minimum.
On the other hand, this payment option limits the value or size of your future acquisition, as you can only spend money that you already have, as opposed to the other financing options.
If the business for sale has a good tax history, the seller may request a pre-qualification letter from a lender who is ready to make the financing. You, as the buyer, also need to be qualified by the bank to get the loan. The downside: this is a solid business, with a good track record, with secured financing, so the seller will request a higher price. In addition, you will have to pay the bank loan rates monthly.
Home Equity Loan
Homeowners can self-finance the purchase of a business by using the equity in their residences through a mortgage. If you choose this type of financing, you need to obtain a pre-qualification letter from a lender to determine exactly the mortgage value. When analyzing the financial performance of the business, consider the monthly payments to this mortgage. However, this particular course of action extends to a greater number of years, resulting in a lower monthly payment, a strategy which might be beneficial for long-term investments.
Seller Financed Loan
Accepting deferred payments through a seller-financed loan will attract more buyers, encourage competition, therefore speeding up the selling process. It will also show the seller’s faith in the future of the business, and as a result, the acquisition price will be higher and the seller will remain involved in the company to some extent.
Once again, before agreeing on the purchase terms of the final sale, it is important that you consult with trained professionals, such as your attorney or accountant, who are up-to-date on the latest legal, financial, and tax implications of each.