Are you planning to become an entrepreneur ? Wondering how to start a business? Buying an existing company could be a better option than starting from scratch. This guarantees you to have a company that is already established and that has existed for some time. But of course, you must have the basic knowledge on how to start a business, and especially on how to buy it.
First things first: how can you get the money to start a business and buy it?
Obviously, it is crucial not to pay too much for the business you want to acquire. If you pay more, the consequence will be a low return on your investment and you may get a lower profit than you had anticipated.
And of course there is the question of where to get the money to pay the purchase price.
If you have enough own funds, this is not a problem. But most entrepreneurs should seek external financing. You can partner with someone else or choose to sell shares to your employees. You can also take the traditional route of requesting a loan from a bank.
However, getting the necessary funds usually involves several problems. Borrowing money may involve providing guarantees or guarantees. If you participate in a society so you don’t have to put all the money yourself, you may have to give up part of your business control.
What if you could buy a business without paying the full purchase price to the seller immediately?
This is how many entrepreneurs get to buy an existing business. They pay a portion of the price at the beginning, and the remaining amount is paid through the so-called “seller financing”.
What is seller financing?
If getting a loan is a problem and you are wondering how to buy a business that you have already identified, seller financing might be the answer you are looking for. As the name implies, it is a way to pay for the business to the previous seller or owner doing it in installments.
But why should the seller be willing to help you with the purchase process through financing? These are some reasons:
- The financing helps to close the deal: the transaction could be delayed or you could even cancel it completely because you cannot raise the money. In such a situation, the seller could go to the rescue by putting between 10% and 60% of the total price. In some cases, this percentage could even reach 90%.
- Financing helps establish trust between the buyer and the seller: if the seller is willing to accept payment for a prolonged period, the buyer’s confidence in the transaction is likely to increase, motivating him to buy. The repayment term could be up to ten years.
- Financing can be beneficial for the seller : although there is a certain degree of risk to him in extending this type of financing, there are some guarantees available. For example, the seller could insist on performing a credit check before accepting financing. It may also require the buyer to present a guarantee or guarantee.
- The financing provides a constant cash inflow : the reimbursement received by the original business owner could include interest. This provides an extra income that could last for several years.
Example of seller financing
Harold Ludwick works in a car repair shop. He has been employed there for 20 years. The business owner, Dominic Jordan, plans to retire in six months.
Harold believes he can run the business and expresses his desire to buy it. The only problem is that he doesn’t have enough money. Dominic asks for $ 180,000, but all Harold can contribute is $ 25,000.
After a long conversation, they agree on the following terms:
- Harold will pay $ 25,000 immediately and the remaining $ 155,000 over the next ten years, along with an interest of 5.5% per year.
- Dominic will be available to provide advice when necessary.
- After purchasing the business, Harold will begin the process of applying for an SBA loan . If your application is approved, you will use that money to pay Harold.
Who is involved in the seller’s financing process?
When you start a business, it is crucial that you get professional help.
Several people can provide you with valuable advice on how to start a business and how to buy it.
- Business Broker: Buying a company can be a complicated process and involves compliance with several rules and regulations. The advice of a business broker on virtually all matters related to how to start a business and buy it can be very useful. One caveat: business brokers generally represent the seller, who pays you a commission. Consequently, the main responsibility of the broker is with the seller. You should keep this in mind when interacting with the broker.
- Accountant: it is crucial to analyze the accounting books of the business you are going to buy. It is absolutely necessary to get an accountant with experience in this field. This person can inform you about the condition of the company’s financial statements.
- Lawyer: Having a competent lawyer on your side is another basic requirement. You will receive advice on the legal aspects of how to start a business and buy it. In addition, your lawyer will review all the documents that must be signed during the acquisition process.
The business agent (who represents the seller), your accountant and your lawyer will help you decide if the company you are planning to buy really costs the stated sale price. At this stage, you will have to start the paperwork that is required to close the deal.
Legal documentation for a seller financing transaction
Here is a brief description of the various documents you may need to carry out the purchase of the business:
- Letter of interest: normally done at the initial stage. It establishes the framework of the process to be followed so that due negotiations are carried out diligently.
- Agreement of agreement: it is a confidential document that details the terms of the transaction. The buyer and the seller can make changes in which they mutually agree.
- I will pay: set the terms and conditions for financing the seller. The amount that the buyer needs to reimburse and the reimbursement dates are mentioned in this document.
- Security agreement : the seller’s financing agreement may require you to present a guarantee or guarantee. This document describes the procedure to follow in case of non-payment.
When you address the issue of how to start a business and buy it, you should pay close attention to legal documentation. A lawyer specialized in this area can be of great help. Try to find it as soon as possible. However, if for some reason you do not, take the following precaution: do not sign any document provided by the seller without first checking your lawyer. Also, do not communicate in writing with the seller without taking the same precaution.
Benefits of seller financing
If you want to know how to start a business but you don’t have enough money to buy it, seller financing may be the ideal solution. Of course, you should probably put a substantial part of the cost of your pocket business; The seller would finance a portion of the total cost.
Once you have bought the business, you should focus on managing it successfully. You may need additional funds to make purchases and make investments, as well as for marketing activities or to make reforms and improvements.
How do you plan to get that money? An excellent option is to apply for a commercial loan to Ferdies Financial. You can process an application as soon as you take nine months with your new business.
Submitting your application will only take a few minutes and will not affect your credit score. The money you get with a loan from Ferdies Financial could provide you with the funds you need to make your new business successful.