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What road blocks does a young individual have to overcome when buying a business?

I am currenly 24 years old. I have a mechanical engineering degree from the U. of Texas, and I am currently working as a business analyst for one of the big 4 consulting firms. (You can see my bio at www.sowellenterprises.com and my latest invention at www.chromsix.com)

I think I would be a very good business owner, and I would like to work for myself. My own "start ups" have barely crawled along because I don't have the funding to push them forward. I always "think big," but I am young without a lot of money in the bank. At this point I would like to buy a business so I can gain experience as an business owner. I would like to fund it 80% LTV with 20% seller carry back, but I know that is a tough sell since I have no marketable experience or significant funds.

How can I make myself more marketable for financing? I would appreciate any other general advice that would help me be successful. Thanks!

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Answers (4)
Cory Hogan
P.C. Hogan & Associates
Helping the Small Business Buyer
CA

Let me clarify a few points on bank financing.

The old days are gone where a buyer could get SBA-backed financing with 5% down and little collateral. This SBA backing is very important since it reduces – now by up to 90% - the amount of risk lenders have in a loan. So working within SBA requirements is very important. Contrary to the much publicized "credit freeze," I do see plenty of SBA loans getting done these days – but a buyer must approach the right bank the right way.

Without special permission, no more than 50% of an SBA loan can be allocated toward acquiring the "goodwill," or intangible assets of a business. And there are monetary caps. This makes purchases such as online businesses with limited or no equipment harder to finance. The SBA wants tangible collateral and will secure personal property if necessary. The business should have solid tax returns that show several years of positive growth. Buyers should have some experience in the industry of interest, and a credit score of 680+ is very important, if not mandatory.

After that criteria is met, the SBA is still looking for some additional security, and may require an additional seller note. As a result, I tell many buyers and sellers to plan on a 25/25/50 mix, where the buyer has 25% cash down, seller finances 25%, and the SBA-backed bank provides the remaining 50%.

If that criteria can't be met, the deal is not necessarily dead. More generous seller financing, non-SBA loans, friends and family, angel, and other sources are available. Sometimes these are the easiest places to start looking, as the SBA process is long and exhaustive (though the due diligence the banks are performing these days are often insightful to a buyer.)

Either way, getting through the financing process isn't easy today. You're best to work with somebody who has been through the process with success in the last 3 months.

Let me know if I can ever be of help!

Good luck,
Cory
www.BusinessBuyHelp.com

Apr 30, 2009
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I just wanted to say thanks for the responses!

Apr 30, 2009
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Property Masters Realty
REO agent
Orange County, CA

Derek,

An impediment I came across as a young entrepreneur were the 3 Cs: credit, capacity and collateral.

Apr 30, 2009
Steven St
World Business Partners, Inc
Los Angeles County, CA

Derek,

I purchased my fist business when I was 20. Do not let your age be a problem to yourself. If others have a problem with your age, let it be their problem not yours.

Now that being said, the 80/20% thing should be out the door until you identify the business you would like to purchase and negotiate the terms of that business. All businesses are different. The funding situation that works for one business could be stupid for another. So I would say, don't even think about seller carry back %s or anything until you have a business in mind.

You're smart to know that capital and having a sufficant capital cushion is what separates most businesses between which will fail and which will succeed. Management and capital is the two most important ingrediates to creating a successful company.

Because you have neither enough experience running a company or sufficant capital to buy and fund a company, you need to put together a partnership of people who have money and management experience.

It's not as hard as it sounds but you will have to bring something to the table as well. What you can bring to the table is a really good deal and a excellent plan.

Here's what you have to do step by step. 1. Find a business that you know something about. You have a degree in engineering, so I wouldn't expect you know a lot about the restaurant business. Find something that compliments your strengths. 2. Once you identify a business, talk to the owner, have an idea of what they want and know that you can make the numbers work. 3. Then you need to write a kick a@# business plan to attract financial partners and for hiring a super star CEO, accountant, and legal team with excellent references. 4. If you have an attractive business plan with an excellent team then you will be able to take that to financial people and get buy in to your deal. You will not get everyone but you might get someone and that's all you need.

This is a very simplified version of what you can do. Of course there are a thousand other steps between each other these. But it all starts with you finding a good deal first.

Find the deal and then find the money.

Hope this helps.

Apr 26, 2009

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