By Eugene E. Valdez AKA The Loan Doctor ™
Can you use a business loan to buy an existing business in the Inland Empire? Yes, many aspiring entrepreneurs do so. It is rare today that businesses are sold for all cash. There is almost always some type of financing involved be it a seller carry back note or a third party bank loan. Business acquisition loans are available but like any loan type lenders have very specific criteria.
For many entrepreneurs the best way to enter the ranks of small business ownership is through the purchase of an existing business. Before we get into the ABC’s of the criteria for business acquisition loans lets go over some general issues of buying a business.
How Do You Find Businesses For Sale?
Classified advertising; Business Opportunity Brokers and Industry Sources. Other sources could include:
Landlords/leasing agents, attorneys, bankers, consultants, business coaches, shopping center management offices, venture capitalists, chambers of commerce and bankruptcy announcements.
Advantages to Buying an Existing Inland Empire Business
It is a less risky way to be self-employed. The existing business has a track record, processes are in place, suppliers are lined up and a client base has been established.
Usually the seller if asked will stay on the payroll for 12 months acting as “consultant” and provide advice to the new owner or “show them the ropes”. Also the seller may be willing to finance some of the purchase price by carrying back a note resulting in a smaller bank loan and buyer down payment.
Disadvantages to buying a business
There are many. Many businesses are sold due to internal problems. As an example a new owner may have to replace most of the current employees who have poor working habits or who are not skilled enough.
Why Are Business Put on the Market For Sale?
Death or Illness of the Owner or Key Partner
Business Heirs Are Not Interested
Owner/Partner shareholder Dispute
In general, these are my suggestions to increasing the odds of obtaining an Inland Empire business acquisition loan:
- Have some type of management experience in the industry of the company you wish to buy.
- Research the industry trends.
- Be prepared to make a cash equity contribution of at least 10% of the purchase price.
- Get the seller to agree to carry back a small short term note and to stay on the payroll as a “consultant” for at least 12 months.
- Obtain historical tax returns/financials on the business to share with the lender.
- Prepare profit projections for at least 24 months.
- Work on your personal credit to get your FICO score above 700.
- Have your CPA prepare a post-acquisition balance sheet to see what it will look like with regards to goodwill, bank loan, total assets, total liabilities and stockholder’s equity.
- Hire an attorney and business opportunity broker to advise you during the process.
- Write a business plan with details on how you intend to increase sales and profits. Include in the plan, your analysis of the competition and what your value proposition will be.
- Research banks to determine if they have an appetite for business acquisition loans.
- If you’re lucky to own any real estate, be willing to pledge it as additional collateral temporarily.
That’s it. Good luck
Eugene E. Valdez is President and CEO of The Loan Doctor and Associates, Inc., a full service banking and finance consulting company located in Upland, CA. He can be reached at 909-230-0024. Like and follow him on social media Facebook, LinkedIn.
*Have a question for our business advice column or an issue you would like to see addressed in our weekly column? Let us know at [email protected]. Contributors to the column are Inland Empire professionals who are experts in their particular discipline.