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Small Business Report

Financing Your Dream

by Steve Monahan

to the seller and the buyer when the seller is willing to finance the sale.

Personal FinancingIn the current economic environment, money is still tight for businesses, but not for individual borrowers. Home equity lines, credit cards, home refinances, personal savings, 401Ks and IRAs are some of the sources of personal financing. Family and investor associates are also good resources. You may be able to transfer your 401K from your past employer to a new corporate entity owned by you through a solo IRA rollover and then borrow up to 50% of that amount. When considering this option, you should definitely seek advice from your CPA or financial planner.

Bank FinancingSBA backed and commercial lenders are viable sources for financing. The downside to this option is the amount of paperwork needed to complete the transaction. Some SBA programs will provide up to 90% financing. Commercial lender financing normally requires 30% to 40% down payment.

What price business should I consider if I wish to have an annual income of $X?This is a complicated process and differs with every type of business. Businesses are generally valued and sold using a multiple of "sellers discretionary earnings" (SDE) method. However, other approaches are available, including investment value, liquidation value, book value or going concern value. The following is an example of a selling price and the income potential of a business using the SDE method.

Business Selling
Price/Income Potential

Ice Cream Store SDE-----------$85,000

Ice Cream Store multiplier
(rule of thumb for business type)-------------------------------------------------------2.3

Multiply SDE by Multiplier to arrive-at suggested selling price-----------------------------------------------$195,000

Divide by 3 (as previously noted, one third down-payment) for dollar amount of down payment-----------------$65,166

Tangible and intangible factors of a particular business will have an impact on these numbers, including upkeep, location, financials, financing, goodwill, etc. All of these will need to be factored into the multiples and the market value.

Once you have evaluated your financial needs and capacity, the next step is to meet with a business intermediary. He or she can assist you in developing your business acquisition knowledge and work with you to find your ideal business.

Steve is the President of Georgia Business Group. For assistance with buying and selling businesses, call Steve at (770) 517-8210 ext. 800.

Prospective Business
Buyers Most Frequently
Asked Questions

Individuals who want to take control of their destiny and change their lifestyles through purchasing a business will have several questions they need answered. Here are the top three questions every prospective buyer should consider before making that important decision.

- How much money do I  need to put down to buy a business?

- What financing options would be available when purchasing a business?

- What price business should I consider if I wish to have an annual income of $X?

I will address each of these important questions to help you consider whether business ownership is not only right for you but will also be financially viable.

How much money do I need to put down to buy a business?A prospective buyer normally would need to put one third of the purchase price down when buying a business. When the seller is financing the purchase of a business, 35% to 50% is generally required. Purchasing a business with bank financing will usually will require approximately 35% down. Small Business Administration (SBA) backed financing will generally require 25% to 35% down; however, there are programs available that may require only 10% down. Remember, these figures are averages; every business, borrower and lender is different. It is important to discuss your situation with a business intermediary or lender for a more accurate picture of your required down payment.

What financing options would be available when purchasing a business?

Seller Financing
Approximately 50% to 75% of all small business sales are financed through the seller. Based on studies of business transactions done by Toby Tatum in his book Transaction Patterns, businesses financed by sellers generated on average an 11% higher sale price when compared to an all cash purchase. The average down payment for the seller-financed transaction was 37%. A seller may be unwilling to finance a sale if he or she needs cash, or is concerned that they may have to take the business back and possibly lose their investment. The buyer on the other hand wants the security of knowing the seller is standing behind the sale of the business. There are several tangible financial benefits