Buying a business is a serious financial decision and it is not uncommon for a potential buyer to not have the purchase price amount of cash on hand. One of the most common hurdles that many Prospective Buyers face is:
How do I finance the purchase of an established business?
Prospective Buyers should think very carefully about how they finance their purchase. However, there are many options for financing, so you can find one that most closely meets your needed. Your personal equity is one of the many options that you can utilize to finance the purchase of a business.
Buyer’s Personal Equity
As a general rule of thumb, a typical business purchase requires anywhere from 20-60% of cash to come from the buyer. This can be a substantial amount of money! Therefore, it is extremely important that a buyer determine how much capital that is able to be risked. Of course, the specific amount will vary based upon the specific terms of sale and the specific business. Utilizing your personal equity to finance your business purchase is a good starting point when looking at financing options. Not only is it a sign that a buyer is serious about it purchase, it can also positively influence others, such as lenders and other investors, to participate, if you are seeking additional financing.
The Buyer Daydream:
Many buyers often have the belief that they will be able to get a business for the least amount of money from them. This is called a highly-leveraged transaction, and is highly unlikely. However, there are exceptions. These could include:
- A buyer with special talents or skills sought by investors
- Buyers whose businesses will directly benefit already existing jobs that are important to the local economy
- The business being purchased is expected to make unusually large profits