Buying an existing business: Financing the purchase
options for the purchase of an existing business match those
for starting a small business with one exception: seller financing.
According to the Small Business Administration, the majority of
owners with small businesses for sale offer financing. When considering
money sources, the buyer should look first to the seller, then to
personal equity and finally outside lenders.
When turning to an outside lender such as a bank or
venture capital firm, the buyer must be able to pledge some type
of collateral. Commercial lenders consider all fixed and some adequately
appraised intangible assets are "fair game." You will not be allowed
the full appraised value of those assets. The type and condition
of the asset, in part, will determine its collateral value. Personal
fixed assets are often pledged as collateral. Generally, real estate
is the most preferred personal asset.
Venture capitalists are going to look for a greater
return on investment
ratio over a shorter period. In exchange for cash, they may
want part ownership or to participate in setting the business's
policies, procedures and operations. Granting partial ownership
bypasses the need for collateral.
For the most part, your financial needs and credit
rating, the market appeal of the seller's business and industry,
and the related level of risk will determine whether you seek a
more traditional, commercial loan, or entertain the idea of venture