The reasons are numerous but include the owner’s concern about confidentiality, a lack of knowledge about how to sell, inertia, and the fact that there are few intermediaries who serve the mid-sized manufacturing distribution markets.
Although you can essentially “buy a job” in a small retail operation for less than $100,000, most of our clients are interested in acquiring a company with growth potential that will enable them to build equity and net worth. A company like that costs more. Generally, you should expect that the minimum price for a company with some momentum, critical mass and growth potential will be at least $300,000. Most of our transactions are from $200,000 to $20,000,000 range.
There are three main forms of acquisition financing:
- Seller Financing – This is the most common way small business purchases get financed. Seller financing commonly requires a 30 to 50% down payment with a Seller note for the balance of the price amortized over 5 years at 10%, but the variations are endless.
- SBA Financing – U.S. Small Business Administration guaranteed financing is increasingly common but requires a fair degree of paper work and patience. SBA guaranteed financing is actually a loan from a conventional lender, guaranteed by the SBA, which makes the lender more willing to extend acquisition financing. An SBA business acquisition loan usually requires 15 to 20% down, and is amortized over 10 years at up to 2.75 points over prime rate. SBA loans are usually only purchase money loans, not working capital loans.
- Conventional Financing – Local business banks are sometimes willing to extend purchase money and working capital loans, but usually the buyer and the business have to be very strong, or solid collateral outside the business has to be available.
- Guarantees – If you form a new corporation to acquire the business, you will probably have to personally guarantee the corporation will pay off any loans made to it. Your performance can also be guaranteed by someone else.
- Assets of the Business – The lender will usually expect to lien the assets used in the business.
- Real Estate – If the assets of the business are insufficient to fully secure the loan, additional real property collateral may be required.
- Other Assets – Ducks, pigs, vehicles, fine art work, jewels, gold bullion…there are lots of possibilities.
After observing many successful purchases, in fact, knock on wood, none of our transactions have been failures. We have seen that the skills and knowledge of senior corporate managers are very applicable to operating and growing a small company. Often, it’s like turbo-charging the business. The most consistent challenge we hear from our clients who have bought a company is not whether they are going to survive, but rather “Wow! How do I fund this growth?”
- Desire and will.
- Aptitude for business development, sales and marketing. No sales, no business!
- Sufficient capitalization.
- Financial skill (or willingness to hire the talent).
- Willingness to learn.
- Sound people management skills.
- Ability to build an entrepreneurial team.
We need you to complete a confidentiality agreement, a buyer profile, a financial statement, and an agency disclosure. Click on the links to these documents to download for individual or corporate. These forms are necessary to ensure confidentiality. The seller doesn’t want their employees, vendors, and customers to know they are selling.