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anoninnyc
07-13-2013, 11:40 AM
Hi All,
I currently working in the Staffing industry. I'm managing a team of salespeople who prospect for new business, and a team of recruiters who find candidates to match said job orders. Staffing, as many know, is a B2B business.

My question is this:
I'm looking to BUY a small to mid-size business, but I'm looking outside the
realm of the Staffing industry, into other B2B opportunities.

Given that I only have experience (albeit significant experience)in one type of B2B industry (staffing), how easy would it be to obtain a loan to buy a pre-existing business situated in a different B2B industry?

I'm looking to purchase a business in the field of Web Analytics for online businesses, or wholesale to small business, etc..

Do you think I'd have a shot at getting financial aid to purchase one of these B2B businesses outside my specialty?

Specifically:
1. Do I have a shot at financing from a typical commercial bank? (y/n)
2. Do I have a shot from seller financing (which most small-to-mid size businesses provide)? (Y/N)

Harold Mansfield
07-13-2013, 11:58 AM
In my experience, people who have the credit and collateral to get a loan, know it.
Doesn't matter that it's not a personal loan, you can't separate it in the banks eyes from your credit history and risk potential.

Banks don't lend to regular people based on a good idea and personality like they seem to do in the commercials. They want to know that they are getting their money back. So they want a good credit history and collateral. Or maybe a co-signer or second mortgage on the house or property.

Another determiner is how much of your own money are you willing to risk. Pretty much no commercial institution is going to front the whole thing if you personally have nothing invested.

When I say "regular people", I mean those of us who don't golf with, legislate for, lobby for, or have family friends in the banking industry who will approve us cause we're "one of the boys".

Anything is always possible, but 9 times out of 10 without any of the above, you are going to be looking for a partner, investor, or self financing.

ArcSine
07-14-2013, 10:03 AM
Specifically: ...
...2. Do I have a shot from seller financing (which most small-to-mid size businesses provide)? (Y/N)

Seller paper involves "show me" sales pitches flowing in both directions. True that the great majority of smaller deals involve seller financing; Seller knows a lot more about the biz than Buyer and can mitigate Buyer's uncertainties somewhat by keeping some of his own capital at risk, at least for a time. Otherwise, Buyer will likely keep a lid on his downside risk by limiting the price he's willing to pay.

But OTOH seller paper means that Seller remains involved as a creditor of sorts (usually subordinated) and so has many of the same concerns as any creditor. While he understands the need to offer seller financing to get a deal done at a more attractive price, he won't throw it around willy-nilly. As you'd expect, it's often a matter of degrees...

• How many (or few) interested buyers are knocking on Seller's door? With several credible offers in hand, Seller will prefer selling to the party who represents the strongest credit quality, all else equal. It's a different story down at the other end of the spectrum, where Seller's options are limited.

• What portion of the total selling price is tied up in the form of seller paper?

But there is a significant difference in the bank's position and the seller's position, despite that in general they're both creditors, and you can sometimes leverage that difference in your favor. Your ability (or at least the perceived ability) to run the company successfully is more important to Seller than to Banker. Not that Banker doesn't care (he does, a lot), but the Banker's paper is backstopped by [1] a senior claim on the first dollars of cash flow; [2] the hard assets of the biz; and [3] personal guarantees from you and possibly other parties. In other words, Banker's note gets paid if you just generate enough profits to service the debt and pay the operating bills. And even if you don't, Banker has a couple of safety nets in place.

The seller's paper, on the other hand, only gets paid to the extent you can generate profits over and above that which is needed to service the senior debt. And Seller's safety nets, if any, can only catch what's left over, if any, after Banker's safety nets have caught their fill.

Hence Seller is very interested in assessing how well it appears you'll be able to run the company, at least during the outstanding period of the seller financing. So if you can convince him that you'll fly the company higher and better than the other buyer-wannabes, you might have a big advantage in landing the deal, even perhaps over other suitors with whom you might not be able to go toe-to-toe in terms of pure credit scores. For example, maybe you bring some marketing expertise to the equation that Buyer feels could potentially generate some attractive new growth when applied to his business.

Similarly, you might consider having the seller paper include an earn-out component, whereby you'd actually pay more to the seller down the road if and as the company's profits exceed specified benchmarks. This, along with convincing Seller that these benchmarks are actually beatable with you at the helm, can be a strong combo in persuading him to give you the nod.

Cheers, and best of luck with it!

LindaKing
07-15-2013, 02:59 PM
Hello - I think you had two very good responses so far...

Have you asked a bank and/or the Seller these questions???? Credit is going to be your determining factor for a bank loan and experience will be for the Seller as they don't want you to default!

My question is are you fully prepared to run this type of business???

Creative financing can be done, especially for fairly good credit but a solid Business Plan will be needed first.

Paul
08-14-2013, 02:37 AM
If the pre-existing business has a verifiable history of profitable operations that will be one of the major considerations for a commercial loan. It's different than trying to borrow start up money. They will probably look more favorably at the wholesale type of business rather than a web based business.

A good start may be with the bank that now has the accounts for the business. They will obviously be familiar with the business and its banking history. If its a good banking relationship they will want to keep the account and may be slightly more motivated to help work it out. Go to the bank manager first, not the loan officer. If you can get the seller to introduce you even better, assuming the banking relationship is good.

jpiracci
09-25-2013, 11:48 AM
Hi anoninnyc, I'm not an expert, but when I bought an existing business I got help with all these issues. It's very hard to buy a business on your own. From what I've ready, 80% of all people who try to buy a business never complete the transaction. There are plenty of places to get real valuable information as well as actual assistance throughout the whole process. I used a company called BizBen. They are based in California and typically sell California business, but they have a program that help people like you buy a business anywhere. There are other companies that offer the same services as well. Here's a link to the program I took advantage of BizBen.com (http://www.bizben.com/blog/posts/bizben-probuy-program.php) . I wish you good luck with everything!

Fulcrum
09-25-2013, 07:18 PM
It's very hard to buy a business on your own. From what I've ready, 80% of all people who try to buy a business never complete the transaction.

I need to disagree with this to some extent. I've bought two business, and merged them, over the past year. Both were bought from retired sole proprietors and both were done on hand shake agreements (I don't recommend this unless you know you can trust the other party and they can trust you). The hardest part I found was figuring out how and where to register everything.

ArcSine
09-26-2013, 09:28 AM
...80% of all people who try to buy a business never complete the transaction.


I need to disagree with this to some extent.

That does sound a bit high at first glance, until one considers the broad range across which the word "try" can be defined, for any particular study or purpose. For example, if the data set only admits deals which reached at least the LOI stage, then the go/no-go ratio might be close to even.

But if we count anyone perusing the "biz for sale" classifieds in the Sunday paper, and making at least one kick-the-tires phone call, as a "try", then 80% is surely low.

Which one I quote depends on whether I'm pitching my services as an LOI draft writer, or selling classified spots for the paper. ;)

Fasttrack
11-15-2013, 01:59 AM
Bought an existing business a few years back - a small Travel Agency. Unfortunately it didn't go well. We got too excited and we suffered the consequences. Lesson Learned!

TheResourcefulCEO
02-24-2014, 06:33 PM
Hello,

I've both bought, advised companies on buying and worked as part of a corporate M&A team to buy companies. As someone who has gotten to the almost closing stage on two acquisitions and had the deal fall through, I think the 80% that jpiracci quoted is likely accurate. Even when working in corporate America, the deals would fall through during the due diligence stage before closing. Sometimes you find things you just don't like and you (or your company) cannot take the risk or the seller won't change the terms to mitigate the risk.

Regarding bank financing, I agree with Paul. Whenever you are looking to buy a company that does not have audited or even reviewed financials, approach the bank that the company runs most of its operating expenses through. That bank sees a lot more than you typically will via the information the seller provides you. It knows if the company is a good credit risk or not. Most of us buy companies based on their future value to us but pay the price based on the actual current value of the company. If the bank does not think the company is a good credit risk, this means the company does not have the assets, cash flow or consistent operating history the bank needs. If you are paying top dollar for the business, you may need to re-think your offer. I have also seen where a bank thinks a company has potential, but not under its current management. In these situations when I've provided the bank vice president (or higher) with an executive summary of what we'll do with the company after the acquisition, the bank decides to lend.

There are many different options for financing an acquisition. This article, Six Options for Financing Acquisitions (http://www.articlesbase.com/small-business-articles/six-options-for-financing-acquisitions-1136160.html), gives you some of those options.

Sean_DeSilva
02-26-2014, 10:38 AM
With respect, I think you are doing yourself a disservice by immediately focusing on the bank as the primary loan source.

The first place you should look as the business itself – specifically, what terms you can get. in the micro business category. You can find owners willing to carry back 50% all day, and if you are willing to face some rejection, you'll find owners willing to carry back 75% given the right circumstances (retiring with a second income source and no immediate need for a large lump sum of cash, high income spouse with high tax obligations looking to defer taxable gains over a longer term, etc.)

So now let's say you find business where the owner is willing to carry back 75%. If the deal is good enough, you will find the money, the just depends where. Could be friends or family, could be an angel investor at your local investment club who happens to specialize in your industry, or it may even be a small bank with a friendly loan officer.

Executive Capital Finance
03-01-2014, 10:58 AM
Business Acquisition Loans: Secured or Unsecured?

With private capital, the primary difference between a secured loan and an unsecured loan is the vehicle used to provide the lender a path to recourse in the event that the borrower defaults on the loan. A secured loan utilizes UCC filings (liens and encumbrances) on business and personal assets which show up on a credit report, where an unsecured loan utilizes a blanket security interest on business and personal assets which does not show up on a credit report.

In either case, the lender will look for at least twice the value of the loan amount in business and personal assets in order to recoup the loan amount in the case of default. No legitimate lender will lend money, secured or unsecured, to any person or business that does not have at least twice the loan funds in assets. Typically, most of these assets should be provided by the business but if they are not, the lender will look at the personal assets of the borrower.

Personal income is also taken into account, but only as a safety valve to make loan payments if the business income becomes unable to support the payments for any reason. In addition, the borrower (and/or their management team) must have a successful history of running a business in the same industry with similar attributes.

For example: A retail store (business only) has only inventory and goodwill as assets, which means that you will have to make up the difference in personal assets from you or a guarantor. $175,000 loan requires you need at least $350,000 in business or personal assets to put up. Since the real estate (building and land) is not included because you're buying the business only, the inventory needs to be valued at a minimum of $350,000 and will have to be maintained at that level. This is still very risky for the lender as you can sell off the inventory and stop paying on the loan and this is why you will need personal assets and income to support the request.

Another difference would be the length of term and the rates offered. Typically, a secured loan will have a term of 3 to 5 years, while an unsecured loan will have a term of 1 to 2 years. Both are fully amortized over the term and the payments may be weekly or monthly and are usually set up on an auto debit schedule from the main business account. Additionally, the rates for a secured loan would range from 10% to 18% depending on the quality of the borrower, while the rates for an unsecured loan would range from 20% to 25% depending on the quality of the borrower.