3 Ways You Can Buy a Business

Foreign. Welcome back to my channel. My name is Mundo. Today we're going to talk about the three ways that you can buy businesses. Our goal today is to help you to change your mindset towards looking at businesses to buy. And hopefully when you think like this, it'll help eliminate a whole lot of junk businesses that just really aren't worth your time and really just aren't either bankable transactions or transactions that you know the seller is not going to entertain. And there's terms that you're not going to be able to come and meet in the middle with. So let's dive right into the three ways that you can buy businesses. So the first way that you can buy business is cash. Obviously, everyone takes cash. The second way you can buy a business is seller financing. So this is where the seller of the business will actually help fund whatever gap that you have in purchasing the business. So let's say the business is purchase price is $1 million and you have $800,000 of financing or cash or something, and there's a $200,000 gap. You could have the seller actually carry that gap over a certain period of time. So seller financing is a fantastic mechanism to use in purchasing a business. I personally love seller financing because it ensures that the seller has skin in the game, which is critical, in my opinion. So if you're buying a business, you are buying earnings, right? You're buying a business that's producing a certain amount of profit and you're expecting to see a certain amount of earnings, and you want those earnings to be consistent. And your goal as a business operator is to grow those earnings over time. But the worst thing that can happen is you buy a business and the business owner, the previous business owner exits and all the employees leave or all the customers leave because they're concerned about what the future is going to look like. That's a bad scenario that you don't want to be trapped in. So having the seller on the hook for seller financing, where they're carrying a portion of the purchase price, in that example, let's say 200,000. They have 200,000 reasons to stay engaged in the business, right? Because they want to collect their money. And that's a great mechanism to ensure that you and the seller are going to be operating together for one common goal, and that's just to maintain the profitability of the business. The other way that you can buy a business is through bank financing, whether that be through a traditional bank or that be through any other type of lending institution. Getting financing from an Institution is typically the hardest way that you can obtain funds for purchasing a business. It is a very long period. You know, typically banks will move slow. They typically will require some sort of personal guarantee. They're going to do a ton of due diligence on not only the business that you're buying itself, but also you as the purchaser. They want to make sure that you have enough liquidity in case things go sideways, that you personally can be able to service that debt that you're going to be asking the bank to provide you. So definitely a challenge in obtaining bank financing. And a lot of times they're not going to give you a loan if you don't have any business experience whatsoever. So that can also be a pretty significant challenge to get. Those three ways of purchasing a business are not mutually exclusive. It can be a hybrid of really all three of those. Right. You can easily purchase a business with bank financing, with cash, a portion of cash, with seller financing. So let me break that down in an example. Let's say again, that business is worth $1 million. Well, you very well could get a loan for $600,000. You could put $100,000 of cash, and then you could have the seller carry the other $300,000 for the total of a million dollars. That is something that you very easily can do. So now that we know the three different ways you can purchase a business, let's think about changing our mindset towards looking at businesses to buy. So let's say you're looking online at a business brokerage website, Biz Buy Sell, for example, and we're cruising through and looking at businesses to buy. The number one thing that I look for in buying a business is how many assets does this company have that I can leverage? By asking that question, you're stepping into the shoes of a lending institution like a bank, and starting to think about underwriting the business that you want to purchase like the bank would. The very first thing they're going to look at is, okay, what are the total assets? Because they view this as collateral. Right. Typically, you're going to get some sort of loan to value. And if there's a million dollars worth of assets, the bank is going to provide you financing based on 75% of it, for example. They're never going to give you 100%. They're always going to require some sort of mix of cash seller financing. A lot of times the banks want to see skin in the game. There's probably going to be a requirement for you to come up with some sort of cash back to that one million dollar business purchase. For example, let's say the bank will finance 75% of it. So you have $750,000 of leveraged financing for a transaction. And let's say your seller is willing to carry $250,000. There are plenty of banks out there that will not do that deal. And they will require you as the buyer to come to closing with some skin in the game. And that is important that they want to see that you are physically putting cash into the business. So you're not just walking away with a situation where you put no money down and there's no skin in the game for you. They want to know that you have something in it. And that is a requirement for a lot of banks that I know of. Now, will you find a bank out there that doesn't really care if you're putting skin in the game? Yeah, probably. You can. Determining the total amount of assets on the company's balance sheet that you want to purchase is the very first thing I look at that is going to set the tone for the negotiation, the way in which I approach the structure to the transaction. If you run into a situation where the seller is open to carrying a large seller financing balance, by all means, go get as much as you can. But as far as a bankable transaction, the more assets you have, the better, because I can collateralize that and get leveraged financing from the bank whenever there's a lot of assets involved. If you take something like a digital media company that really has no assets, maybe they had some production equipment or whatever, but it's a very small amount of assets, that type of transaction is going to require either A, a significant amount of cash or B, a significant amount of seller financing, or really mix of both between A and B, that is going to be much more difficult to get a bank loan. Not saying you can't go get one, I mean, you definitely can go get something like an SBA loan, But again, that's going to be a very long, drawn out, painful process. They're going to require all these personal guarantees. They're going to have all these contingencies in place and it is definitely a route to go, especially if you can't find a middle ground to where the seller is not going to carry the portion that you need to close. You have no choice but to go get a loan. Using leverage in a transaction is always better. You get to use other people's money, you get to keep more cash flow, and it's going to help you scale faster. Thanks for watching today. I hope you enjoyed this video. If you did, do me a favor, please like and subscribe. Also, check out the links below to our Passive Business Journal newsletter. We focus on delivering value to you weekly and I promise you're going to get benefit from from this. And to show you that you will get access to our Letter of Intent template when you first sign up, I have personally used this template to put in offers to purchase 10 million dollar businesses successfully and you're going to get that absolutely free. Thanks again for watching and see you next time.