Financing Your Business Purchase

Bank financing for Main Street businesses is typically in the form of SBA loans. SBA loans are originated by SBA participating lenders, which generally make the loan with the SBA guaranteeing a portion of the loan in case of default.

SBA-backed loans are subject to specific underwriting guidelines regarding fees, interest rates, collateral, personal guarantees, amortization, covenants, and other forms of debt. To learn more about the SBA and its loan programs go to www.sba.gov or talk to your Apex Advisor.

There are many preferred SBA lenders who your Apex Advisor knows and understands their lending criteria. It’s important for a buyer to talk to multiple SBA lenders after their purchase offer is accepted.

A portion of the financing for a typical Main Street transaction commonly comes from the business seller. We refer to this form of financing as “seller financing” or “owner carry”. The amount and terms of seller financing agreements vary significantly depending on the nature of the business being sold, the general availability of third party financing, the buyer’s cash down payment and various other factors.

The willingness of a seller to provide some financing is also an important psychological factor for some buyers in that it can be interpreted by buyers as a demonstration of the seller’s confidence in the future prospects of the business being sold. While the interest rate on “seller held notes” varies, we usually see rates of 1% to 3% over Prime, depending upon prevailing interest rates and the expected repayment period.

In the Middle Market segment (businesses with revenues in excess of $4-5M), sellers may provide some form of non-contingent financing, but it’s less common than in the Main Street segment. That said, Middle Market transactions often include an “earn-out” provision which effectively makes a portion of the business sales/purchase price contingent upon on the future performance of the business.

Earn-out provisions are popular with buyers in that they help mitigate the business buyer’s downside risk. They’re especially common when there is a significant fluctuation in the business’ historical financial performance and/or historical to projected financial performance.

Your Apex business intermediary and accountants can assist in determining what, if any, “earn-out” components should be included in the purchase price/offer for a business.

Many of the business buyers we work with elect to use their retirement funds (401K plans, IRAs, etc) to finance their business acquisitions. Benetrends, Inc and other innovative firms have developed methods whereby you may be able to fund your business purchase by using your retirement plan assets without incurring taxes, interest or penalties.

There’s a very specific process to be followed when using these funding mechanisms, so it’s important to use a firm that specializes in this type of transaction. If you’re interested in learning more about this financing opportunity, ask your Apex Advisor.

In addition to the SBA loan program, the United States Federal Government sponsors the USDA program. There are a number of USDA loan programs. If you’re contemplating a transaction in a rural area, we encourage you to learn more about USDA loan programs. For more information, please refer to the USDA website.

Home Equity Lines of Credit are another popular source of funds to buy a business. Typically, a buyer would access this equity for additional down payment or working capital. Banks will often tell buyers that this is probably the least expensive source of funds.

Again, we encourage you to work with your Apex business intermediary to assist you in identifying and evaluating the best financing options for your business purchase.