Over the next decade, older Americans are expected to transfer trillions of dollars of wealth to younger generations. This expected transfer, referred to by some as the \u201cGreat Wealth Transfer\u201d and the greatest such occurrence in the world\u2019s history, will include older generations relinquishing ownership of many profitable small businesses \u2013 presenting a once in a lifetime opportunity for many aspiring entrepreneurs.<\/p>\n\n\n\n
A startling $7 trillion<\/a> worth of small businesses currently owned by Baby Boomers will likely be up for grabs by 2030. While many of these businesses may not be glamorous \u2013 think businesses like HVAC, commercial cleaning, tree trimming and other similar \u201cboring\u201d businesses \u2013 with a bit of effort they can provide incredible returns on your investment. Plus, in many cases, you\u2019ll have the opportunity to support the families and communities who rely on these businesses, which is the \u201cfeel good\u201d icing on the cake.<\/p>\n\n\n\n However, as we teeter on the edge of a potential recession, banking crisis, waves of corporate layoffs, and more, finding the funds to finance that business purchase may seem difficult at best, and impossible at worst. What many potential buyers may not realize, though, is that there are many ways to structure a deal, and some do not actually require much upfront cash.<\/p>\n\n\n\n There are three key forms of small business financing to be aware of: debt, equity, and seller financing. Most deals have a combination of the three, and the structure of the deal will dictate your options when it comes to financing and planning. Whether you\u2019re actively in a position to buy or just evaluating your options, here\u2019s what you need to know about each approach and how this knowledge can help you finance a small business acquisition.<\/p>\n\n\n\n Debt typically makes up about 80 percent of the typical small business deal structure. The most common type of small business debt financing is from the Small Business Administration (SBA)\u2019s 7(a) program<\/a>. This program helps creditworthy small businesses acquire financing where they wouldn\u2019t otherwise be able to.<\/p>\n\n\n\n Through this program, SBA lenders receive a government guarantee for the acquisition loans they provide to borrowers like you. This typically results in more attractive terms for borrowers, including no covenants and as little as ten percent down. In fact, in some instances, you can put as little as five percent down if you get the seller to finance an additional five percent in a \u201cstandby seller\u2019s note,\u201d or a note that isn\u2019t repaid until after the SBA note is repaid.<\/p>\n\n\n\n It’s important to note that the SBA 7(a) program does ask the borrower to take a For larger acquisitions (above $2 million in earnings), conventional financing options do exist. The benefit of conventional financing is that, typically, there\u2019s no personal guarantee required. However, these loans do come with a wide variety of terms that typically include covenants and larger down payments.<\/p>\n\n\n\n Wondering where you come up with the 10 percent down payment required by the SBA? If you don\u2019t have the funds yourself, you can seek out investors to help bridge the gap between the funds you have and the funds you need.<\/p>\n\n\n\n The terms of equity investments in the small business space vary widely based on the deal, investor makeup, and the relationship of the business to the investor. Most deals, however, involve a “preferred return” \u2013 a fixed interest percentage that must be repaid \u2013 and “step up,\u201d meaning a raise in the valuation of the capital.<\/p>\n\n\n\n As an example, you might have an equity investor who invests $100,000. That invested capital receives a \u201cstep up\u201d that values the investment at $200,000. Their preferred rate is ten percent, and after that $100,000 and interest is repaid, that investor is on equal footing with the rest of the equity.<\/p>\n\n\n\n This is obviously a very linear example, but the point remains that if you find a good deal and are someone people can see themselves working with, it won\u2019t be hard to find investors who will bet on you on workable terms. Now more than ever, investors are looking to partner with small business owners who want to boost their local economy and contribute positively to the workforce. If you can prove you\u2019re prepared to do that, you\u2019ll be in business.<\/p>\n\n\n\n Seller financing, when the seller personally finances a portion of the small business purchase price, typically makes up around ten percent of your deal structure. In addition to reducing the equity a buyer needs to make the purchase, seller financing often indicates that they\u2019re interested in having skin in the game.<\/p>\n\n\n\n This might sound strange, but if a seller is willing to personally finance part of the price of their own business, that speaks volumes about their assurance of the go-forward viability of their organization. This is one of the reasons why seller financing is incredibly common.<\/p>\n\n\n\n In fact, there\u2019s no limit to the amount of seller financing you can ask for, and there are cases where some less \u201csalable\u201d businesses can sometimes be 100 percent seller-financed. But, be aware that you may end up paying more in interest depending on the length of the financing terms. Some sellers may view financing the sale of their business as an opportunity to multiply the principal value of their business through interest payments, which isn\u2019t necessarily a bad thing, but is something to be mindful of as you negotiate.<\/p>\n\n\n\n The important terms to consider with seller financing are:<\/p>\n\n\n\n Every deal structure looks a little bit different. While typically someone purchasing a small business is 80 percent reliant on debt (like an SBA 7(a) loan), and ten percent reliant on both seller financing and equity, that doesn\u2019t mean you have to be. Here are some factors to consider when determining the right structure for you:<\/p>\n\n\n\n How much flexibility do you need? How much are you willing to possibly forego? If the seller offers fair terms and is cooperative, you may choose to go with a deal structure that favors seller financing. However, if you have a solid relationship with a lender and can get flexible terms for a loan, debt may be the cornerstone of your deal structure.<\/p>\n\n\n\n This probably sounds like a no-brainer, but it\u2019s important to consider how much cash from the small business you\u2019re looking to acquire you could spend on that acquisition. Especially when a personal guarantee is involved, be sure you understand the risks you could be undertaking so you\u2019re prepared to pay back your debt in whatever way you can.<\/p>\n\n\n\n No matter how cooperative a seller is or how easy a deal seems, there are always complex issues that come up. Working with an experienced lawyer who represents and understands small and medium businesses is essential to ensuring your deal is done correctly and is in the best interests of you and the business you\u2019re acquiring.<\/p>\n\n\n\n While finding the money to fund a small business acquisition can seem daunting, there\u2019s a wealth of opportunities available to you to structure your deal through loans, investments, and seller financing. Gone are the days when only the rich could consider acquiring businesses; now, nearly anyone can purchase one of the many small businesses being sold by Baby Boomers as a result of the Great Wealth Transfer. If you\u2019re looking for an opportunity to make a move on owning your own business, the time is definitely now.<\/p>\n\n\n\n Find Out How Much Your Online Business is Worth<\/strong><\/p>\n<\/div>\n\n\n\n Flippa\u2019s intelligent valuations engine is the industry’s most accurate tool, taking into consideration thousands of sales and live buyer demand. Find out what your business is worth with our free valuation tool and plan your next move<\/a>.<\/p>\n\n\n\nDebt<\/h2>\n\n\n\n
\u201cpersonal guarantee\u201d \u2013 meaning that you would have to promise the lender that you will repay the debt no matter what, including using personal assets if your small business doesn\u2019t have cash on hand to make the payments. This can raise the stakes significantly, and not everyone is comfortable taking on that kind of risk. That said, this type of loan is still a great option for many small business owners to get the financial footing they need to buy their dream small business. Moreover, they can easily repay the loan once they begin reaping the rewards of their business.<\/p>\n\n\n\nEquity<\/h2>\n\n\n\n
Seller Financing<\/h2>\n\n\n\n
\n
Structuring the deal<\/h2>\n\n\n\n
Flexibility:<\/h3>\n\n\n\n
Business Finances:<\/h3>\n\n\n\n
Financial and Legal Complexities:<\/h3>\n\n\n\n