Mack was frustrated. His bank was giving him the run around regarding his offer to buy a business. Because the business didn’t include land or a building they were reluctant to finance him. Mack thought the deal was dead and reached out to me for support.
Every week I am working with people who want to buy businesses or commercial properties and don’t have quite enough money. Often they are a little disappointed with their recent interaction with a bank and sometimes, like Mack, they are ready to give up. However if we are creative in financing the business sale, we can revive the deal and everyone can move forward towards their dreams of retirement or business ownership.
So here are some creative financing ideas that seem to work for buying businesses and commercial property that many buyers might not have thought about:
1. Try a different bank: Not all banks are created equally when it comes to financing businesses and commercial properties. Depending on their appetite for risk and portfolio diversification, banks have different lending strategies. Recently I have talked to some banks who are willing to do up to 100% financing on buildings where the owner will be running their business from. Other banks are willing to finance with 20, 30, or 50% down depending on the investment type and risk.
2. Vendor financing. Vendor financing is commonplace in businesses more so than with commercial properties or residential investments. This is because sellers know that banks are reluctant to finance some businesses without property attached and because of their motivation to move on to the next state of their lives are willing to finance some portion of the sale.
3. Partners: Oftentimes when I am selling a business there are multiple people interested in buying the business. Some prospective buyers are struggling with how to manage the business after their purchase or coming up with enough funds. Bringing your own partners or finding partners once you have a business or property in mind can be a great strategy that enables you to buy a business or property. One caution is that you will want a partnership agreement that includes a shotgun or buy/sell clause to enable you to get out of the partnership should a serious disagreement arise.
4. Investors. In 2006 I was alerted by a friend of mine to a potential investment in my community. Within 24 hours I had an accepted offer that I couldn’t finance myself. I reached out to friends and family and within a few days was able to put together a company that ended up making money for all the investor partners involved.
5. Options: An option is an agreement between you and the business owner to buy a property at a set price for a certain amount of time. While this might not be an outright way of purchasing a property, if prices were to increase substantially, it might be a way of securing financing considering the increased value.
6. Use the existing financing. Some banks will enable you to take over an existing mortgage for the purchase of a commercial property if your credit ratings are good.
7. Vendor Buyout where Vendor Stays as a Partner. If you are willing to work with the existing owner and your seller will continue to have a stake in the business, some banks will finance the purchase amount up to 70%. I have seen this done a number of times where investors have been able to secure bank financing and buy a portion of the business with little or no money down when the owner stays on. This can be a win-win situation for the owner who needs support and wants to get some cash out of the business and new owners who would like the knowledge of the current owner and bring their energy to grow the business.
In Mack's case we went back to the owners and explained the situation. In a couple of hours they were able to negotiate a 3 year loan with an interest rate that benefited the seller and worked for the buyer. The buyers were ready to move on. Mack had a considerable amount of down payment and while the sellers would have preferred a full buyout, they understood that this was the best option at the moment for everyone involved.
Creative financing is an option and sometimes the only alternative when buying or selling a business. Exploring all the possible options should be one of the first things you do when considering buying a business. The second should be figuring out your exit strategies, however that is the topic for another conversation.
Dave Fuller, MBA, is an Award Winning Business Coach and a Business and Commercial Realtor. Email firstname.lastname@example.org