According to The Complete Guide to Business Brokerage, (Thomas L. West, pg. 69), “Over 60 percent of all businesses have four employees or fewer, and that almost 80 percent of all businesses have 19 employees or fewer. Recent studies have also shown that the average price business sold by business brokers is less than $350,000. A recent survey also indicated that 46 percent (that’s almost half) of all buyers have less than $100,000 in cash to use as a down payment.”
Nearly 90 percent of business buyers are first-time buyers. Most of the are looking to replace a job. Income substitution is a major reason for purchase. Most buyers have between $50,000 and $100,000 they can use toward a down payment. Since most businesses are between $150,000 and $350,000 that means most buyers won’t have enough funds to pay cash for the business. When buyers have enough money to buy a business using all cash, they typically will want to leverage their money to buy a bigger business, not pay for the business outright. When they do pay for a business using all cash, they usually expect a discount, which can be substantial. The adage that cash talks is still true today. Most sellers have to choose between getting top dollar or getting cash. The chances of a business selling are much greater when an owner is willing to offer financing.
Trends in typical sources for financing for buyers:
- Bank Financing
- Hard Lenders (Non-bank lending companies)
- Owner Financing.
At Beacon Brokers, we offer another exciting way to finance your next business purchase using money from your 401K or IRA. When you make your appointment to meet with us, we can tell you more about how you can be the master of your own money in buying your next business.
“Studies reveal that, on average, a seller who sells for all cash receives only 70 to 80 percent of the asking price. Sellers who are willing to accept terms receive, on average, 86 plus percent of the asking price. That’s almost a 16 percent difference on a business listed for $150,000, meaning that seller who is willing to accept terms will receive about $24,000 more than the seller who is asking all cash. The seller who asks all cash receives, on average, a purchase price of 36 percent of annual sales, while the seller who will accept terms receives, on average, 42 percent of annual sales.” Beacon Business Brokers can help you look at your finances and help coach you as to how you can best obtain financing to help you meet your business buying goals.
Why take advantage of the trend to offer owner financing?
- The seller makes much more money overall because of the interest they can charge on the sale. In most cases, the interest rates are higher than what a bank would typically charge.
- The tax consequences are often advantageous. Seller financing can spread the tax burden over more time rather than expose the seller to a huge capital gains hit.
- Sellers who are willing to owner financing create buyer confidence. If they are willing to sell it with “skin in the game” then the buyer feels the seller is willing to stand behind the asking price and the business itself.
- Because the seller is acting as the “bank” it is important to to get a credit history and how long they have lived in their house, whether or not they have a good banking relationship and if they have personal references.
- In some business segments, banks simply do not loan money on those types of businesses. If there is no financing there simply won’t be a sale.
With good contracts involved, very few buyers walk away. It is important to have a professional, like Beacon Brokers, help you structure your financing to your greatest advantage. No one can guarantee that anyone will succeed in their business but when the seller asks for a significant amount down, very few business owners will walk away from that initial investment. What ever the terms are going to be, make sure they are in writing at the beginning of due diligence. Having a lawyer, like Todd Jackson, your risks can be reduced significantly.
The most cutting edge solution continues to be using your 401K and IRAs to finance the purchase. Beacon Business Brokers’ sister company New Day IRA is ready to help you set that up for you. No other brokerage in the Greater Nashville area is set up to help you do that paperwork in-house. Ask us how.