As financing markets have remained tight over the past several years, it has presented a difficult scenario for many prospective business buyers. I have talked about seller financed deals on many occasions over the past decade in this forum and the fact is that seller financed deals still today, and ALWAYS will represent the bulk of how smaller business sales get done.
For some buyers however, they are looking for outside sources to assist in the financing. While these situations do exist, one must recognize that the potential investor pool to find individuals for small business acquisitions is limited. Often times, buyers go to the immediate resource of friends and family. While this can be an effective source it also brings with it a whole set of considerations. Mainly, if the business goes south, so too can your relationship.
If you are going to look for third party investors, you will face the “chicken and egg” syndrome. Do you secure your investors before you find the business or do you find the business and then look for investors?
The answer is simple: you do both.
How is that possible?
Think about it – if you start with finding investors their first question (before they ask how much money you want) will be – what is the business?
At the same time, if you look for businesses first, sellers will want to know early on how are you going to pay for the purchase.
Therefore, you have to balance both – you look for businesses while you secure investors but never, ever mislead a seller into thinking you have the funding lined up unless you do. Be honest. Some sellers/brokers may balk or even refuse to go any further with you. That’s alright, you can always revisit the opportunity later.
I wish I could direct you to a pool of investors who are sitting by and eagerly awaiting deals to come their way. Sadly, that resource is not plentiful. Almost certainly, the investor will come from a known source and therefore you have to get the word out and tap into your network.
Investors are not going to be betting on the business – they will be betting on you! As such, it is paramount that you give them the confidence they need to bet on the jockey rather than the horse.
While you may not know the exact business early on, it is critical to get their commitment to at least seriously consider certain deals you bring to them. Keep in mind, it is very easy for people to say they will assist with the financing when they don’t have to actually reach into their pockets. What you want to avoid is finding the perfect deal only to hear a bunch of excuses from the investor why they can’t do it.
It is imperative that you assemble a list of fundamentals that you and the investor(s) agree are paramount to any financing. These criteria can be revenue, margins, net income levels, industry type, or numerous other data points. Rank their importance. Again, you and the investor have to agree but remember The Golden Rule:
"He with the money makes the rules”. In other words, their criteria out ranks yours
Once you have a business that meets their get their feedback. Generally, you will be able to tell early on after presenting a few opportunities whether or not they are serious. It’s a good way to take their temperature. If they do nothing but find faults in every business, they may not be the right source for you unless of course their criticism is constructive; they ask a lot of questions and express genuine interest.
Using outside lenders is not easy – the workload increases to get a deal completed. Nevertheless, it can be done however, making sure you align yourself with serious investors who can get a deal closed is infinitely more important than the loan terms compared to someone who offers a great deal but cannot get to the finish line.
To YOUR Success!
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