3 Ways to Finance the Sale of a Business

A buyer with 100% cash is rare. Some sort of financing will most always be needed to close the deal. There are various options for financing covered below with the understanding that a buyer’s qualification is the key element. The ability to finance a buyer purchase is often the “make or break” point to closing. 

However, the amount of cash flow a business generates is a key factor in determining how a business sale is financed. Cash flow is profit before taxes. It is what the business is truly earning determined by taking the net profit or loss from the tax returns then “adding back” to the net profit or loss any non-essential, non-business related or balance sheet items like amortization, depreciation, waand interest. Too many business owners also concentrate on gross sales without proper knowledge of the basic operating expenses that enable profit from their business (cash flow). Cash flow is the true profit of the business and the asking price will always be a variable or multiple of cash flow. Cash Flow – not gross sales – determines the profitability of the business.  Buyer qualifications are important as well, particularly with SBA Financing. 

Let’s dispel one myth; the misconception that the seller HAS TO hold a note or mortgage on the business to get a deal closed. This is not true, and it totally rests with each seller’s preference. While we contend that selling a business with some amount of owner financing makes it slightly easier to sell, we always advise owners to speak with an accountant about the pros and cons to holding a loan on their business. 

Here are the three types of financing… 

  1. Owner-held financing. There may be some tax benefits using this approach depending on the size of the transaction. 

2. Local bank loans. Bank financing is very difficult for a buyer to secure in the small business environment, since banks are risk averse. Bank lending is the primary reason for the misconception that lender financing is difficult. 

3. SBA financing through third party lending sources. This is the primary lending source used to fund buyers of small businesses. These lenders are specifically in business for small business lending. Most business buyers do not know of these types of lenders have the contacts to use them successfully. 

In any event, getting the advice of a professional business broker is always a good idea. For more information, contact me at ………………………………………………