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How can I determine how much of a business I can afford to buy?

I am seeking to purchase an existing and established small business in the near future. In order to narrow my search, how can I determine how much I can afford if I have "x" amount available in assets for a down payment? I have asked my SBA advisor, accountant, and prospective brokers and lenders, but I cannot seem to obtain a straight answer. I do understand that each circumstance is unique (e.g. seller financing), but how can I cut to the chase so I can avoid wasting both time and money during my search that is unrealistic? Is there a safe norm like 20% of purchase price? I would love to establish a range of how much I can afford. Please help! Sincerely, frustrated.

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Answers (2)
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Much appreciated, Don. Best response I have received to-date.

Sep 23, 2011
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The BAF Group LLC
MD

Normally, 20% down is a key number. But there are a LOT of variations, depending upone the stance of the SBA, which might get you in with 10% down. You may also be able to get the Seller to "give you a loan" for some of the money. Let's say the Lender will require 20% down, for your particular situation. If you only have 10% of your own, you might "borrow" 10% from the Seller to give you a total of 20%. But then you have two notes - one for the Lender and one to the Seller, so you have to be careful about whether the business has the cash flow to provide you with both payments.

If you have Seller financing, the amount down is normally much higher. Sellers will frequently want to carry as little as possible in the way of a note, and it is not unusual for them to demand 30% to 50% and even more, in the way of a down payment.

The reason no one wants to give you a specific amount is because you have no idea from whom you will be borrowing. And even if you do have an idea, your own credit rating, your experience, the industry you are entering, the particulars of the business you want to buy, the amount of the note, how much the note payments will take of the business' historically available cash, and other issues all come into play. Remember that no Lender - no matter who or what it is - wants to take a risk. The amount of risk they perceive is directly proportionate to the amount they will demand down, the security they will require and the general terms they will offer - if they offer any loan at all!

I hope this helps. I was rambling...

Sep 23, 2011