5 Steps to Financing a Business Purchase

Business financing options are important whether you're ready to buy a business you've been part of for years or want to acquire a competitor to expand your market share. Buying an existing company is often a smart move. You're able to build on the branding, products, and customer base that the company has established, while improving operations through your own ideas and efforts. Financing the purchase of an existing business may be more complex than starting a new company, but a number of options are available to you. Here are five steps to help you navigate the world of business financing options.

Work with a business broker

Start your process by establishing a relationship with a business broker. According to Inc. Magazine, the best brokers will be members of the International Business Brokers Association and hold the Certified Business Intermediary (CBI) designation, or be members of the M&A Source with the M&AMI designation. Experienced brokers can help you manage the buying process from identifying the right business to securing funding. Brokers have wide networks within the financial world, and the experience to help you find the option that's right for you. If the broker you're working with represents the business seller, it's important to consider that and make sure you have adequate representation.

Know your valuation and do your due diligence

Your broker will help you manage the valuation process. Plan to get second opinions from your attorney and CPA. Ensure that you understand how the business is being valued. For example, the Cash Flow Method looks at future cash flow to see what kind of loan the business can support. The Tangible Assets Method values a business based on its assets on the balance sheet. Different methods are acceptable and appropriate for diverse business models, but should be supported by your own due diligence. Most businesses are valued as a multiple of earnings (earnings before interest, taxes, depreciation and amortization, or EBITDA). Review at least three years of financial records, tax returns, contracts and leases, customer data, marketing materials, HR information, and any other facts you can gather.

Consider owner-financed purchases

According to the International Business Brokers Association, seller financing is becoming more common than other methods. Seller financing is an alternative to commercial bank or small business loans. Typically, the seller holds a note on the sale of a business for a period of up to ten years. Smaller monthly payments are generally arranged and one or more balloon payments pay off the majority of the debt. Seller financing demonstrates that a seller is invested in helping the new owner succeed. This can be very persuasive to banks when a buyer needs multiple funding sources to complete a deal. A business broker can help negotiate and structure an owner financed deal.

Evaluate loan options, especially Small Business Administration (SBA) programs

Regular bank loans may not be available to finance a small business purchase. Instead, buyers work with an SBA lender using an SBA 7(a) business acquisition loan. The SBA works with approved lenders (such as qualified banks) to offer SBA loans. The government backs these loans, lowering the risk for participating banks. Programs under this umbrella range from microloan initiatives offering under $50,000 to the Certified Development Company 504 Loan Program which helps businesses buy land and buildings.

Connect with angel investors and other high net worth people

Depending on the type of business you're purchasing and its financial potential, an angel investor or venture capital firm might be the option to consider. Angel investors are high net worth individuals that offer money in exchange for equity in the company. High net worth people (and some private equity groups) sometimes offer private, unsecured loans called mezzanine financing. These loans often have higher interest rates. For individuals with a leaner credit history that don't qualify for other options, angel investors are worth exploring. Business brokers often have a network of individuals in the market for specific deals; if your history and company meet their requirements, they can facilitate an introduction and structure a transaction.

Small Business Coaching Advice: Scalable Solutions

Have you ever watched the television show This Old House? Imagine you're on it, working on a 75-year-old house with its original electrical wiring and plumbing. What would happen if you plugged in a full complement of modern electrical appliances? You'd blow your fuses, not to mention create the potential for an electrical fire to break out. And what would happen to your plumbing if you went from a well-water system to tapping into the higher pressure of city water? (Can you say rain gear?!)

Likewise, too much growth that makes increasing demands on old, outdated systems is what causes most growing businesses to fail. The systems that worked for a $500,000-a-year business are no longer sufficient to cope with a $5 million business, and not even close to being adequate for a $50 million business. At first, the additional sales will cause a few "leaks," but before long, your business will have burst pipes and water everywhere! That's why one of the key building blocks of a truly successful business is scalable solutions. (We call this type of business a Level Three Business. A Level One business is a start-up; a Level Two business is an owner reliant business that works only because the owner is there each day to make it work; a Level Three business is a systems driven business with a winning management team in place.)

Case Study: Morgan

Morgan was a young man in his late 20s when he started his mortgage brokerage company, Morgan Financial. He built a successful Level Two business for himself in Portland, Oregon. After a few years operating in one office, Morgan took the scary step of opening a second office. It turned out to be profitable, and for a time, he settled back enjoying the results of his two offices. If that were the end of Morgan's ambitions, the story would have ended like it does for most small-business owners... with Morgan settling back into his 30- to 40-year role of running his two-office mortgage business as a self-employed business owner.

And for years, that's the business he was satisfied with-two offices helping home buyers get mortgages. That was until he met a key mentor named Doug. About 10 years older than Morgan, Doug had built up several successful businesses. He provided the capital, confidence, and counsel that Morgan needed to scale his business to Level Three.

Over the next eight years, Morgan went from two offices with a handful of staff to more than 200 offices and 1,000 team members in 23 states doing $1 billion of loans annually. Morgan made the first leap from one to two offices by himself in four years. With the help of his mentor, he went from two to 200 offices-a one hundredfold increase-over the next eight years! How did Morgan explode his business from two to 200 offices in such a short time? He followed the Level Three Road Map and built a systems-reliant business with sound controls and a clear way of doing things that he and his team scaled rapidly.

Morgan and Doug ended up selling their company to a private equity firm and made millions because they actively understood and followed the Level Three Road Map (our name for the step-by-step, level-by-level progression through the lifecycle of your company from launch to exit.)

Now back to you and your business!

Scaling your business requires building it in such a way that your model and systems can be rolled out and replicated on a much bigger playing field. This also means when you're solving a business challenge, you look for solutions that can be scaled. For example, imagine you're an online retailer who sells physical products online. One choice for shipping customer orders is for you to hire your cousin Vinny to come over each day to your garage and box and ship out your orders.

Vinny is an extreme example of an "unscalable" solution. You could improve the situation by hiring a full-time person to set up and run a formal in-house shipping department. This solution would be slowed by your need to hire more people and secure more space as you grow. Plus, you'd have to invest in the technology and develop the systems to cost-effectively monitor your inventory and do your shipping.

A third-and scalable-solution would be to outsource your shipping to a professional fulfillment company that already has thousands of times the capacity and proven systems to reliably ship your orders.

Take another example. Imagine you're building a web platform to process orders from your traveling sales force. When evaluating which platform to purchase, a Level Three thinker would choose one that could handle the high transaction volume you eventually want to have, provided the cost for this greater capacity isn't too high. If the cost doesn't make financial sense, consider a smart alternative. Choose a platform that can be easily upgraded later as your sales volume increases and you have the excess cash flow to warrant the upgrade. You'd say "no" to any platform that couldn't handle your expected sales volume or be easily upgraded and expanded later.

7 Examples of Scalable Solutions

Scalable solutions are flexible. They remove barriers to growth and eradicate unnecessary constraints. Here are seven examples of scalable solutions that business owners we've worked with have used to profitably scale their companies:

1. Outsource inbound orders to a call center. You not only benefit from the flexible staffing of the call center, but you get instant access to the systems and technology that the call center has developed to handle hundreds or thousands of times the call volume you may initially have.

2. Create a new client "Quick Start" DVD or kit that introduces new clients to the steps they need to know working with your business. Then a live staff person isn't required to constantly repeat the information. This could be something you hand to a new client or post on your website and email the link to a new customer.

3. Build an online inventory control database that automatically ties your sales data into your inventory control, accounting, and purchasing systems.

4. Move from working with one client at a time to working with a group of clients. For example, you could offer webinars and teach online classes to hundreds of clients at the same time with no added time and few additional costs. (Bonus: Make recordings of those classes available for later download by thousands of additional clients.)

5. License a key piece of intellectual property to another company for a royalty.

6. Joint venture with a complementary company to provide your customers with a new product or service to purchase and enjoy. No fulfillment or customer service would be necessary on your part.

7. Create a hiring and new-team-member orientation system that allows you to staff up quickly as your business grows.

Take a moment and write down two concrete ideas that came to you as you read this article on scalable solutions and how you can apply them to grow your business.

Why Use A Business Broker When Selling Your Business

When a person decides to sell his or her own business the first thing on their mind is to enhance the value of their business as much as possible so that they can get the maximum returns from it however, anyone who has tried selling their business knows that most of their time goes in trying to find potential buyers and screening them, also in the process of selling and other small tasks that go with selling a business which is quite counterproductive at that crucial time. This is why most of the business owners opt to sell their businesses through an experienced broker who manages all those aspects that the business owner really does not need to take care of, saving a lot of crucial time.

There are many benefits of hiring a business broker when one decides to sell their business:

Using a business broker saves from the unnecessary stress of the employees and the competitors becoming aware of the process. Once the word gets out, it is inevitable that the employees will start looking out for other jobs; the lenders will start demanding their money as they will be worried that their money may not be returned, and the competition will definitely move in stronger. The business brokers keep the identity of the company confidential and only use the details instead of the name.

Business brokers are in the business of selling a business and have better contacts than a business owner would. Using a business broker definitely increases the chances of landing a better deal and finding a reliable buyer who will provide for a smoother transaction.

Business brokers also have tools to better evaluate a business. It is not as easy as evaluating a piece of estate since a business has many and more complex aspects that need careful assessment. With the use of these tools, a business broker can easily estimate a better and more accurate cost of the business and eliminate the chances of missing out on evaluating many minor assets that may seem unimportant to the untrained eye.

Business brokers understand how to present a business in the most appealing manner; they know what points or features will make it more buy-able and are skilled at making a good sales pitch to potential buyers. This ensures that a business owner not only gets the best price for their business but also finds the best buyers in the market.

A business broker not only makes sure that you get to focus on the business while they go out and find the buyers for you but he/she also knows how to reach the right buyers. Their contacts, their experience, and most importantly their access to various databases makes it possible for a sale to be made in the right way and faster than it would have happened without them.

Employing a business broker to evaluate to price your business and find the best buyers for you while you take care of the functions not just ensures the chances of a good deal but also saves the grievance of employees and other involved parties approaching you with questions and doubts as the word gets out, it gives you the time to address the situation in a more organized manner and saves everyone a lot of speculation and worry.