Printing Money May Not be One of the Options for Financing a Business Transfer, but There are Options Out There.

For small to medium-sized businesses, there are several types of funding sources for financing a business transfer.

Each type is governed by the same basic factors, such as; transaction size, asset base, type of company and cash flow.

When beginning this step of the business transfer, it is good to know that delays in the financial process can be avoided early if certain precautions are taken. So before discussing a buyer’s main funding options, there are some overall matters to consider or prepare.

  1. Buyers should make sure to check their own credit and clean up any outlying issues.
  2. Personal financial statements are also important to have totally complete and ready, crossing all the “T”s and dotting all the “I”s.

A top level view and take away points for each of the main funding options

All Cash Sale

Most sellers will, of course, be favorable to an all-cash offer. It is also a given that an all-cash offer can come with a steep discount. This discount is about 40% of that of a suitable offer with financing.

Owner Financing

Another alternative to bank financing is owner financing. Not all transactions are acceptable for institutional financing, and if an owner is not willing to discount their asking price 35-40% for an ALL Cash Sale, then owner financing might be the only other option for financing a business transfer.

SBA Financing

The Small Business Administration (SBA) is a federal agency that will guarantee a portion of an approved loan. Financially, they only consider the EBITDA and the adjusted EBITDA. They use a strict debt coverage ratio to ensure a borrower will be able to repay the loan, pay themselves a salary and have enough left over for emergencies. Along with cash flow, the SBA looks at the buyer’s industry experience as part of their approval process. A buyer should make sure that the bankers and intermediaries they are using are familiar with this process.

Earn Out

An earn out is a negotiating tool that can off-set the sales price and allow a portion to be paid at a later time with specified positive revenue within a specific time period. If profits decrease, then the earn out percentage decreases. However, if the profits are higher than projected as negotiated in the terms, the earn out does not increase. The reason the earn out will stay at the same amount is because the increase is considered the result of the buyer’s efforts. Therefore, it also justified the higher price the seller was asking. By keeping to their guns, in this scenario, this option works well for both sides.

Conventional Financing

This financing is against the assets in the business or personal assets to collateralize the loan. Financial institutions often heavily discount the value of the assets to protect the bank’s risk. These loans are a great option for lines of credit and real estate loans.

To learn more about funding and financing a business transfer, a copy of Entrance – A Guide to Buying a Business by Alex Vantarakis can be purchased in paperback form or as a download at The Vant Group – Book page.


Who is Your Buyer?

Before starting the selling process, determining where your potential buyer will come from will put you ahead of the game. Know who your buyer really is.

Each business transaction is different, but there are common factors to any deal. There are certain main aspects of a buyer, each with their own list of pros and cons to consider, which typically are:

  • Do they have industry (whichever type your business falls under) knowledge/experience?
  • Are they a first-time buyer?
  • Will they need financing?

A business broker should be able to give a preliminary idea or priority list of the most likely types of buyers. By knowing the type of buyer, the seller will have a better understanding of their needs or constraints when it is time to make or close the deal.

Broken down to the main or top-level categories, there are essentially six (6) different types of buyers. Again, what is a “pro” for one type, might be a check in the “con” bucket of another type.

Is Your Buyer the:

Corporate Executive

A usual concern for this type of buyer is whether or not they are trying to relocate or stay in their current geographical location. These are often first-time buyers, but make sure they are serious. A business transfer requires a doer, not a dreamer who is not ready to leave their current state of employment.

Competitor or Vendor

This can be the best idea or the worst idea. Though they will have knowledge of the industry, if the business transfer is not a quick process, a competitor can cause harm in the marketplace to drive down the revenue. However, due diligence should be cut markedly. Depending on their motivation, they could pay a considerable amount more than asking or their situation might not require inventory that could be on hand and therefore result in not wanting to pay top dollar.

Existing Employee(s)

A great option for bank financing if they can come up with the funds for securing the loan. Being that they are already invested in the business, they are of lower risk. If they are not able to come up with these funds, owner financing should be expected to be on the table. So it is fundamental to know if the business is being sold to a business minded individual.

Investment Group

They are always looking for a good deal but are not interested in handling the day-to-day responsibilities. If a good management team or the owner is staying on in some capacity to run the business, the deal is more likely to sell for asking price.

Intergenerational Buyer

Keeping a business in the family can be ideal. A good rule of thumb is to use an unbiased third-party company to handle the valuation before a deal is put on the table. Family transactions can carry the added weight of emotion, so using separate attorneys and CPAs as any other business transactions is recommended. Because of familiarity, it can also lengthen the time for an accepted offer. Make sure to set clear expectations so relations are not damaged in the process.

Foreign and Public Companies

This is a very unlikely buyer for small businesses. The larger the transaction, the more viable an option this buyer type becomes. Being in contact with this type of buyer will require clear mediation to determine what each other’s requirements of the deal really are.

To learn more about how to find the right buyer for your business, pick up a copy of EXIT– A Business Owners Guide to Selling a Company, by Alex Vantarakis.