Financing The Purchase
The purchase of a small business can be financed a number by a number of resources, including:
- Family, friends or partners
- Commercial banks
- Home equity, pension funds or insurance cash value
- Government agencies
- Strategic partners
Typical business purchases involve:
- Buyer’s cash (always): Usually, 20-50% of the purchase price comes from your cash reserves. A seller or bank may be reluctant to finance any portion of the purchase without this commitment. You must also consider reserves to be used for operating capital.
- Seller financing (usually): Sellers will consider financing as a way to receive full value of the business. Seller financing demonstrates confidence in the business as well as a continued commitment to success. Such financing is usually structured as a term loan, consulting agreement or non-compete agreement.
- Institutional financing (rarely): Government-secured loans may be available and include reviews of you and the business to be financed. Institutional financing usually requires your personal guarantee and subordination of any loans made by the seller.