Financing The Deal Articles Archive - South Florida Business Broker Russell Cohen

Business Broker Russell Cohen

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Financing The Deal Articles Archive

Venture Financing: The Hard Facts

Government financing and venture capital financing account for less than one percent of all new business financing. Sixty-seven percent of all small to mid-sized businesses are financed by personal saving or friends; thirty-three percent are financed by lending institutions. The facts about venture capital financing are especially cold and hard… Venture capital is limited to high-growth potential, high capital-absorbing businesses. Venture capital benefits as few as 1000 businesses a years, and then… he average investment is $2.3 million, divided between 3-4 venture capital funds, which take 40-50-60 percent or more of the business’s equity. Venture capital investors expect the business to grow to $25-50 million within 5 years–at which time the business will go public or be... read more

Lessons Learned: Comments from Those Who Failed

The following appeared in a study, Financial Difficulties of Small Businesses and Reasons for Their Failure, prepared for the Small Business Administration (SBA). They are statements made by individuals whose business was in financial difficulty and subsequently failed. Their comments are listed under the stated reason for failure. Tax Troubles IRS stepped in and took over the bank account. The IRS threatened to repossess [our] tools of trade if [we] did not pay the $20,000 back taxes immediately. When the IRS agent told us that they will put padlocks on our doors if we can’t come up with the money in one month. Pressure from IRS. The IRS is “merciless.” IRS was attempting to reach the non-debtors wife’s income (i.e., levy) for the tax liabilities, which all preceded her marriage to the debtor. The IRS changed the locks on the business, and the business had to declare bankruptcy in order for the owners to be able to even get into the building. Personal Profiles Bank was not going to refinance her business because of divorce settlement. Inability to control blood glucose level, cholesterol, etc. due to stress of dealing with creditors. His wife has a nervous breakdown. He just knew they couldn’t handle their bills. The injury to his arm. She could not pay her medical bills. She had filed bankruptcy as soon as she couldn’t pay her bills, rather than get behind in payments. Creditors were hounding him to pay his wife’s credit card. He had not canceled the cards after the divorce. He returned his but never closed the accounts. “I had lost court case in trying... read more

Friends and Family: A Financing Option

The first job facing many prospective business owners is rounding up the cash necessary to make the purchase. They may find that banks have made borrowing difficult (or all but impossible), and that even SBA loans have requirements too stringent to meet. One viable option is obtaining financing from the seller; another is to seek help from family and friends. Borrowing money from family members and/or friends is one of the most frequently-used methods of small business financing. The pluses are obvious–there is trust, familiarity, and a general comfort level when dealing with those you know. The drawbacks are self-evident as well: “doing business” with family and friends comes with cautionary notes of legendary proportions. Everybody knows that family ventures can be complex and stressful, stirring up “bad blood” and lingering ill will. However, by taking the right preventive steps, buyers can take advantage of friendly financial help. 1. Set up an informal meeting to introduce your ideas. This is the time to “feel out” friends and relatives casually, being sure they understand that this is strictly a fact-finding (and fact-presenting) meeting. Anyone who is not interested or cannot afford to be involved has plenty of opportunity to say so without feeling obligated–or emotionally “blackmailed.” 2. Follow up with a professional business plan. Those who have indicated interest should now be treated with utmost professionalism. A formal business plan, including detailed financials, and a carefully-drafted business contract should be presented at this subsequent gathering. Consult a business professional for help in establishing a schedule for repayment based on the appropriate interest rates. Nothing will inspire more confidence in lenders... read more

Financing the Business Sale – Some Questions to Answer!

Structuring the purchase of a business is an issue that should be faced early in the selling decision. Ultimately, the final structure of the sale will be determined by actual negotiations between buyer and seller, but the seller must still answer the following questions- What is the lowest amount of cash acceptable from the sale? Has consideration been given to paying off all unsecured creditors and a portion of the closing costs? (Both are, in most cases, the seller’s responsibility.) Is there any long-term or secured debt that can be assumed by the buyer? (This may make more cash available to the seller.) What is an acceptable interest rate for the seller-financed sale? Will the business be able to service the debt and still provide a return acceptable to a buyer in relation to the down payment required? (This is a particularly important question for the seller to address.) What are the tax consequences of the sale? The professional business broker is a good source for assistance in structuring the sale of a business. Although they are not able to provide legal advice, business brokers are the experts of preference when the arena is the business marketplace. Brokers will use their knowledge of previous sales, current market conditions, and outside financing strategies, if applicable or available. A business generally represents a seller’s largest financial asset. How the sale is structured may mean the difference between the success or failure of the transaction. The best sale structuring will result in the best deal possible for both buyer and seller. A business broker can be the key player in accomplishing this... read more

Financing the Business Sale

Structuring the purchase of a business is an issue that should be faced early in the selling decision. Ultimately, the final structure of the sale will be determined by actual negotiations between buyer and seller, but the seller must still answer the following questions: What is the lowest amount of cash acceptable from the sale? Has consideration been given to paying off all unsecured creditors and a portion of the closing costs? Is there any long-term debt that can be assumed by the buyer? (This may make more cash available for the seller.) What is an acceptable interest rate for the seller-financed sale? Will the business be able to service the debt and still provide a return acceptable to a buyer in relation to the down payment required? (This is a particularly important question for the seller to address.) Recent studies indicate that the more favorable the terms the higher the price. In fact, one study found that offering favorable terms might increase the total selling price by 30 percent. A business broker professional can advise you on the all-important issue of seller... read more

Financing the Business Purchase

Where can buyers turn for help with what is likely to be the largest single investment of their lives? For most small to mid-sized business acquisitions, here are the best ways to go: Personal Equity Typically, anywhere from 20 to 50 percent of cash needed to buy a business comes from the buyer and his or her family. Buyers who invest their own capital (usually an amount between $50,000 and $150,000) are positively influencing other investors or lenders to participate in financing. Seller Financing This is one of the simplest and best ways to finance the acquisition, with sellers financing 50 to 60 percent–or more–of the selling price, an interest rate below current bank rates, and a far longer amortization. Many sellers actively prefer to do the financing themselves, thereby increasing the chances for a successful sale and the best possible price. Venture Capital Venture capitalists are becoming increasingly interested in established, existing entities, although this type of financing is usually supplied only to larger businesses or startups with top management and a good upside potential. They will likely want majority control, will want to cash out in three to five years, and will expect to make at least 30 percent annual rate of return on their investment. Small Business Administration Similar to the terms of typical seller financing, SBA loans have long amortization periods. The buyer must provide strong proof of stability–and, if necessary, personal collateral, but SBA loans are becoming more popular and more “user friendly.” Lending Institutions Those seeking bank loans will have more success if they have a large net worth, liquid assets, or a... read more

Financing the Business Acquisition

The epidemic of corporate downsizing in the US has made owning a business a more attractive proposition than ever before. As increasing numbers of prospective buyers embark on the process of becoming independent business owners, many of them voice a common concern: how do I finance the acquisition? Prospective buyers are aware that the credit crunch prevents the traditional lending institution from being the likely solution to their needs. Where then, can buyers turn for help with what is likely to be the largest single investment of their lives? There are a variety of financing sources, and buyers will find one that fills their particular requirements. (Small businesses – those priced under $100,000 to $150,000 – will usually depend on seller financing as the chief source.) For many businesses, here are the best routes to follow: Buyer’s Personal Equity In most business acquisition situations, this is the place to begin. Typically, anywhere from 20 to 50 percent of cash needed to purchase a business comes from the buyer and his or her family. Buyers should decide how much capital they are able to risk, and the actual amount will vary, of course, depending on the specific business and the terms of the sale. But, on average, a buyer should be prepared to come up with something between $50,000 to $150,000 for the purchase of a small business. The dream of buying a business by means of a highly-leveraged transaction (one requiring minimum cash) must remain a dream and not a reality for most buyers. The exceptions are those buyers who have special talents or skills sought after by investors,... read more

Financing Facts

There still aren’t too many ways to finance the purchase of a business. Here are the primary methods: Buyer Financing Some buyers may have the cash available to purchase the business. Some may elect to use the equity in their residence, or other real estate. Others may have other assets that they can sell or borrow against. Bank Financing Banks may lend against a buyer’s assets as described above. They may also lend against the assets of the business, assuming there is sufficient value to support the loan. The business will also have to make sense to the bank, regardless of the asset value. In fairness to the banking system, many of the figures supplied by business owners have very little relationship to the actual earning power of the business Venture Capital Firms These firms do not, as a practice, lend to small or even many mid-size businesses unless tremendous growth is anticipated. They also usually expect an equity position in the company SBA Loans These have become more popular. There is now some competition among lenders for these loans. Many banks offer them, but the large non-bank companies seem to have the upper hand in both acceptance and service Other Sources This category includes family, friends, relatives, credit cards and leasing companies. Some suppliers have been known to assist in the financing of a small business. Seller Financing This is, by far, the largest source of financing available for the purchase of a business. Many industry experts say that about 90 percent of small businesses sell with, or perhaps because of, the seller financing a good portion of... read more

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