There seems to be a lot of business acquisition activity in the marketplace right now. I have several clients that are in various stages of this process. Depending on whether you’re on the buy side or the sell side, here are three ways the acquisition can get financed.
1) Bank Financing– This may be a limited option for a couple of reasons. In the typical business acquisition (asset purchase) when the purchase prices is allocated over the assets of the business, there’s usually an asset called goodwill that gives banks heartburn. This is due to the fact that there’s usually no collateral to cover it. In addition, most banks are only willing to go 3-5 years on the term of a conventional loan for this purpose, so the payments are quite high. However, depending on your circumstances, if you can stand the payments and have additional collateral to support the loan, this could be an option.
2) Seller Financing-This can be a good option for a couple of reasons. If the seller is willing to finance the purchase, then that takes the bank out of the picture entirely. You will probably still have to come up with some cash to put skin in the game to induce the seller to take back the loan. Check with your CPA, but if you’re the seller, you should be able to take installment sales method and pay the gain on the sale over the life of the loan vs paying it all in the tax year the business is sold if you take cash.
3) SBA Financing-While this is still bank financing, the SBA has the 7a program which can be used for business acquisition. Typically, a 20% down payment is required but the bank will finance the remainder and obtain a 75% guaranty from the SBA. The guaranty allows them to give the buyer a 10 year term vs 3-5 years for a conventional loan. While there is still a collateral shortfall, the lender will usually put forth ” best efforts” to fully secure the loan with personal assets if there is a shortfall of company assets to secure the loan. There is an SBA guaranty fee which is passed on to the borrower, usually 3% of the loan amount, but most lenders will finance the fee in with the loan proceeds. These are the most common options, however some instances will include a combination of seller financing (subordinated to the bank) and either a conventional or SBA loan to make the deal work. It’s important to discuss the structure of the sale/purchase and all the terms and conditions with your CPA and attorney to address any legal issues or tax consequences.