The vast majority of businesses, particularly smaller businesses, are purchased with a significant portion of the purchase price financed by the owner.
However, you still must make a down payment and be sure that adequate working capital sources are available.
Institutional lending
If you do not have the funds needed for the down payment readily available, you must look for financing from an outside source. To grant such financing, an institutional lender is almost certain to require personal collateral, such as real estate, marketable securities and cash value of life insurance, as well as financial and operating data of the business. It is rare for a loan to be granted to purchase a small business when only the assets of the business secure the loan.
It must also be demonstrated to the lender that the buyer is of good character, has a clear source of repayment, and has a good business plan.
Leveraged sales
Privately-held businesses are rarely acquired without leveraging the business's assets in some way, pledging them as collateral for a loan made either by the owner of the business or an outside lender. Leveraged sales are best for asset-rich businesses. The owner has a strong incentive to provide financing if he feels it is necessary to get the price he wants for the business and has confidence in you.
Tax consequences
Each type of structure carries with it different tax consequences for each party, affecting the overall value of the transaction to you and the seller. The type of corporation owned by the seller, the size and date of the transaction, and the type of consideration paid may all have tax consequences. Since tax law is constantly changing, it is important to seek legal and tax advice in determining the best way to structure the sale.
Useful links:
Banks are the most common form of external finance for small businesses.
Other:
Other sources:
British Business Angels Association >>
National Business Angels Network
5th Floor
52-54 Southwark Street
London
SE1 1UN
Tel: 0207 089 2305
The National Business Angels Network (NBAN) helps businesses obtain equity finance and can assist private investors in their search for investment opportunities. NBAN is a national service working across the UK to achieve introductions between private investors (business angels) and businesses seeking finance. NBAN is sponsored by the major high street banks and leading professional firms.
British Venture Capital Association >>
Tower 3
3 Clements Inn
London
WC2A 2AZ
Tel: 020 7025 2950
The BVCA has 300 members – over 160 full members who are private equity companies active in making equity investments, and over 150 associate members who are professional firms able to advise on private equity transactions, or organisations that invest in private equity as a minor part of their overall activities.
Local Investment Fund >>
123 Minories
London
EC3N 1NT
Tel: 020 7680 1028
The Local Investment Fund makes loans to social and community enterprises that have been unable to secure funds from traditional sources.
Books:
Raising Capital for Dummies
Joseph W. Bartlett (2002), Hungry Minds Inc,US
ISBN: 0764553534
Introduces small-business owners and would-be entrepreneurs to the basic principles of venture capital. Raising Capital for Dummies puts readers inside the heads of venture capitalists and angel investors and outlines what they look for.
Raising Start-up Finance
Phil Stone (2001), How To Books
ISBN: 1857037057
Raising Start-up Finance is a guide to getting the right funding to start a business.
