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Question about financing?

Hi. I have never bought a business before so im learning of the process so i will know what to expect.

Ok. When trying to get financed for an existing business purchase, I realize that lenders want some part of downpayment to show you are willing to take a risk also.

What if the owner is willing to offer financing for a large amount of the asking price? Could this take the place of my downpayment since I myself do not have the needed amount of funds required?

Sorry if this is a dumb question but im just trying to get a better understanding for my current situation.

Thanks

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Answers (16)
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Aug 19, 2016
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Shelby County, TN

My personal finance situation is of this as of now.
I a few months ago moved home with parents to pay off debt. I am currently debt free. Ive worked a job for past 6 years and i make around 45k a year. I bring home between 2100 and 2300 every month. Im not necessarily wanting to quit my current job.(Unless down the road the business would permit me to do so).

Only 2 businesses I'm interested in.
1-Would be a coin operated laundromat. 2-An internet business(preferably drop-shop with excellent organic rankings).

1 laundromat became for sale recently where i live which got me interested. The owner is a pilot and completely absentee. Someone is already in place who does the daily tasks opening and closing and everything involved(which quite frankly isn't much. I personally believe a 5th grader could run this easily, but thats just my opinion). As far as operating capital i believe i could manage with what i make from my current job. This is one of the businesses I was just interested in and owner says he is williing to finance a portion of asking price.

An internet business would be what i would want to do definately over anything else if i could find the right one. Actually waiting on a broker to get back with me on specific ones i have inquired about. Not looking for a million dollar business but definately one that has a net profit of atleast what i make with my current job and has done so consitantly for the past few years.

Operating costs for this im sure would include any fees associated with the website running itself which isnt very much and advertising costs.(Would rather find one with excellent organic ranking where advertising isnt overwhelming, and i have found plenty like this in the past). If it came down to it i am somewhat self taught on runnning ppc campaigns.(Not sure how that would hold up explaining that to a lender but it is the truth.)

Drop-ship...where no inventory is stored and nice contract in place with supplier would be great.

Either one of these situations would not require me to currently quit my job. Like i said before i am currently debt free except for little bills that are a must. I would definately love to quit my job but not a must, definately if it would mean the difference in getting financed or not.

Guys that is my situation currently. Im not broke but dont have a whole lot saved up.

Again thanks for your comments. I appreciate them.

Feb 24, 2010
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The BAF Group LLC
MD

I think we all understand you are just exploring and asking, and all of the answers point to the same conclusions. There is not a single argument to any of what has already been said, particularly from Robert and Julie. I would add two more points.

First, as a Broker, I would never want to bring such a "nothing down" deal to the Seller. To me, it would smack of saying, "Your business is practically unsalable, unless you take this enormous risk of dealing with someone who has no money." This is NOT to insult you, or to suggest that if you have no money, you are apparently a worthless human being. But as a Broker, part of my job is to provide a Buyer that represents little or no risk to the Seller. As a matter of personal philosophy, I believe that the Seller took the risk when he/she started or bought the business him/herself; he should not have to do the same, in exiting.

Second - and I said this in a response to you on Feb. 18th - I would STRONGLY suggest you NOT get involved in ANY business, if you are undercapitalized. And your questioning sounds like you may have very little cash, in any way. If that is the case, what are you going to do when you need to purchase inventory? Pay payroll? Pay taxes, utilities, rent...all those frills and extras that go into that awful hole in the universe we call EXPENSES?

The overwhelming number of businesses that fail, do so for lack of financial support to get them through the lean times. And the first six months are the epicenter of "the lean times"; in many businesses, you can add twelve months to that. You need to understand the seasonality of the business, the payment cycles that affect both Revenue and Expenses, and what you will need to keep the business afloat through all of that.

Getting financing is one thing. Making those payments is a completely different and crucial concept, altogether.

Feb 23, 2010
Robert Cutler
Attorney
New York County, NY

Yes, it is basically impossible for you to purchase a business with no money down. I can think up scenarios where a lender might extend financing without a downpayment but you would need substantial assets and/or existing cash flow, and it sounds like you have neither. There are many small businesses out there that can be purchased for very little money (in fact I just saw a posting on this site today for a small business for sale for $25 K) so I don't think it is accurate to say that you need "huge money stashed away" to buy a business, but given the credit environment and the inherent risks to the lender you will certainly not be able to get away with zero money down. In fact, I should point out to you that even in real estate, where the concept of zero money down first became popular, this strategy is a thing of the past due to declining real estate values and more stringent lending standards.

Feb 23, 2010
Julie A. Barnes, CPA
Small Business Exchange, Inc.
Travis County, TX

Wow - you're receiving sage advice from everyone. However, I think we all believe that some pieces are missing. Do you have any expertise in an industry? Have you narrowed your sphere of interest? Are you able to bring something to the table? If so, you may be able to negotiate a management contract with a seller for a 'probationary period' to allow both of you to gauge the probability of success.

If, in fact, you are able to generate profits that prove your ability to succeed and to pay back owner financing in a timely fashion (while paying yourself a living wage), you may have a winning proposition. It's a LONG SHOT and rarely works unless you find an owner who is retiring and is extraordinarily patient.

On the other hand, I've personally shepherded a few convulted transactions that required a minimum downpayment. Be prepared to write a concrete business plan and to pay a healthy interest rate. It's called 'sweat equity" for a reason and the negotiations - quite frankly - are a bear.

Good Luck
Julie A. Barnes, CPA
President, SBX, Inc.

Feb 23, 2010
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Shelby County, TN

Ok. So if lets say a lender was willing to finance 70% of the asking price and the seller tells me he is willing to finance up to 30% how could i use this to my favor?? If you are telling me it's basically impossible to purchase a business with no money down?

Again guys im just trying to get a better understanding . Just wanting to know how i can use that to my advantage.

Every city and little town is ran by small businesses everywhere. It just seems that surely not everyone in this country has huge money stashed away for business purchases. Maybe im wrong, but im definately going to give it a shot once i find something that fits me and worth doing.

Feb 23, 2010
Robert Cutler
Attorney
New York County, NY

I agree with Don (as usual). There's no way the lender would permit that arrangement. Maybe you can try raising the funds from friends and family in exchange for equity in the business? It isn't ideal but I don't think you have any other options.

Feb 23, 2010
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The BAF Group LLC
MD

The Seller taking a loan in place of a down payment, and the bank covering the rest? Ain't gonna happen!

Feb 23, 2010
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"Peter-I wasnt asking that the owner finance me 100%. I meant him take back a note to cover the downpayment and the rest of the loan from a lender."
I may be confused--- aren't you still asking for 100% financing-- part from owner and part from bank?

Feb 22, 2010
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Shelby County, TN

Thanks to everyone who took the time to give me answer. I appreciate it.

Peter-I wasnt asking that the owner finance me 100%. I meant him take back a note to cover the downpayment and the rest of the loan from a lender.

Again thanks everyone.

Feb 22, 2010
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I suggest you contact Michael Lee. He is helping with financing for a business. As long as the business has good financials, he should be able to help. michaellee500@yahoo.com
Good luck !

Feb 22, 2010
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How to Buy a Business
WA

Your question is a bit confusing. There are two basic parts to the acquisition price: the downpayment and the balance which can be financed a seller note or bank loan or a combination of the two. The seller can't take a note and cover your downpayment too. If he were to do that then there really is no downpayment. It's a 100% no money down deal. But don't hold your breath waiting for one of those.

Feb 21, 2010
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Biz2Credit LLC
New York County, NY

We at www.biz2credit.com do a large no. of business acquistion deals. These days banks cap the equity contribution from seller note at 10% of the business value irrespective of the amount being financed byb the seller. The total downpayment required is any where between 20 to 25% depending on the knid of business, historical financials, the experience of the new owner and his/her personal financial strength and credit score.

Feb 18, 2010
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The BAF Group LLC
MD

Historically, getting part of the down payment from the Seller was a regular part of business sales. Robert's point is well taken, in that much of the down payment requirement is to guard the lender's position, should there be a decline in the value. In the current economy, that is much more of an issue than ever before, even with real estate loans.

But banking lenders will not normally allow the entire down payment to come from a second loan from the Seller. Whether they officially stipulate it or not, they will express the need for the Buyer to put some "skin" in the deal.

Moreover, you need to be careful about whether borrowing that much is safe, from your perspective. Does the business throw off enough Cash Flow to permit you to pay two notes: One to the Bank and one to the Seller?

I have said over and over again in this forum, that one of the biggest reasons that businesses fail, is because of a lack of capital, from the beginning. Does your need to rely on the Seller for part of the down payment mean you would go into this venture, cash poor? If so, that could be a deadly mistake!

Feb 18, 2010
Robert Cutler
Attorney
New York County, NY

I should point out that some lenders (in particular non-traditional lenders such as private equity funds) may forego the downpayment requirement if you have substantial assets that you can put up as security for the loan, but it doesn't look like this applies for your situation. Also if you have excellent credit and can document substantial income you may qualify for an unsecured loan, although again this probably doesn't apply for your situation.

Feb 18, 2010
Robert Cutler
Attorney
New York County, NY

The purpose of the downpayment isn't to show your willingness to take risk. Rather it is for the protection of the lender. Lenders typically want an equity cushion in case the value of the business should decline, which can happen for numerous reasons including bad management. Even if the owner is willing to finance a large portion of the asking price, whatever amount you borrow from the bank will require a downpayment, which will vary based upon the nature of the business.

Feb 18, 2010

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