If you have been following any one of my recent blogs you should have read that I have got touting from the top of my lungs that now will be the time to be buying a business. In case you haven’t been recently following my blogs No later than this restate why I think now’s a great time to be buying a small business.
Why? Well, one of the reasons is always that business valuations have come to decrease in price. Businesses that were providing for 3 to 4 times all their net profit are now providing for 2 to 3 times all their net profit. Or once they were selling for 6 to 7 times their net income they are now selling for several to 5 times their web profit. This is a substantial lowering of price from several years ago.
Now, this statement is valid in generally all of the enterprise sectors such as the retail and also service categories. Of course, you can find going to be some categories that truly hot at a certain moment that is selling for a large, but generally this true today across the board in most of the organizations on the market.
The second reason I do believe now is a great time to be investing in a business is that the cost of funds is about as cheap currently ever going to get. You can obtain a commercial loan to purchase a profitable business for 5% or oftentimes lower depending on your credit along with the situation and the lender that you are working with.
So let’s say I always have convinced you with this description now is the time to buy a small business because the valuations are decreased and you can get a good deal for the purchase of a business and the price of money is cheap. Although gee Terry didn’t you recognize that banks aren’t loaning and it is hard to get a personal loan? If you said or considered that you would be absolutely right.
Banks do have money to be able to lend, but they have improved the rules on lending, or perhaps should I say that the Federal Government has evolved the rules for lending on their behalf, and therefore it has become more difficult to acquire a loan in today’s economic environment. Of course, all of this is true, but there exists still a way to get this loan for the business that you are wanting to buy. Yes, purchasing or getting 100% money is long gone unless of course that you are working with private investors, although we are talking about financial corporations today so I will stay devoted to such accordingly.
Nearly all lenders are sitting on the roof of a pile of cash and they are in the business connected with renting money. Yes, that is certainly how they make good earnings in the banking and financial business of money. They receive a commission from people who deposit their funds into their bank and shell out them a pittance intended for doing so and then they rent which money out to people similar to me and you for a profit. It is just a very simple formula. Once My spouse and I understood that banks were being nothing more than renters of money it probably is a very simple formula to understand.
Consider the Fed have transformed the rules and told the actual banks they must be more advisable in their renting of money the actual banks have become more traditional in the way they rent out their cash, but they still are in the company of renting money.
Several years ago before the Fed came to the city and changed the rules upon renting money an individual could possibly buy a business with even just the teens down and the bank financing the remaining 80%. Sometimes your bank would keep the note by themselves and earn the high monthly interest they were charging for the leasing of the money or occasionally they would sell it off to the SMALL BUSINESS ADMINISTRATION and only retain a portion on the loan thereby allowing them to preserve money in their bank along with repeat the process again and again. No matter what it was a good deal for the person that needed a loan to buy by themselves a business.
Now though the regulations have changed and if you could have spoken to a lender not too long ago you would then understand that they might are still willing to loan a person money for that business a person wanted to buy, BUT it much better has a solid cash flow plus they are not going to loan 85% of the purchase price. No, most likely they are going to be willing to financially loan you maybe 50% in order to 60% of the purchase price from the business.
But wait a person says. I don’t have a lot of money! Heck, if I had been buying a business for $500, 000. 00 then rather than having to come up with $100, 000. 00 (20%) now I need to come up with $200, 000. 00 to $250, 000. 00. That is crazy that you do not have that kind of money. Does not the bank understand that I have great credit, this is a good business, you will find no jobs to be had out their place, and if I had which kind of money I almost certainly wouldn’t be in the situation that we are now?
Well to start with the bank doesn’t really treasure any of that. All they can be concerned about is keeping their very own job. So it is better to show you no and keep their task than to make a loan for your requirements that could get them in trouble and so they lose their job and they would be just like you (except that they wouldn’t have as many dollars saved as you have) just like is what we call some sort of lender making a career decision. It’s easier not to make the mortgage and keep their job instead of taking a chance on the wrong loan and possibly dropping their job. (I really had a bank Leader tell me that one time). However, I am straying from the stage.
The point is since there are new guidelines and the banks want additional money down and you don’t have the cash how do you get the loan? The correct answer is right in front of us. We will get the additional capital we want from the seller of the company. He should be aware of how hard it is to get a loan in the current marketplace and if he isn’t very he must have been living with no TV or access to the internet to find out what has been going on with the banking system. But in case the Seller of the business is simply not cognizant of what is happening in our marketplace in regard to the financial environment then I would question the Seller of the business to travel to visit his local along with long-established banker individuals for a loan to refinance his business.
Yes, hold the Seller go down to his outdated banker buddy who he’s got had a long relationship using, and have him ask him or her how much money he would loan him or her against HIS business. At this point remember this is a business that is a good business and has also been up and running for quite a while. This is what we’d call a reality check, for the reason that the Seller of the business will discover real quick what’s going on in the world of lending for businesses. Hi, if I am wrong concerning this then great everyone has got the loan they want and you may totally disregard this article. However, I don’t think I am incorrect on this one.
But returning to getting that loan. Right here again it is really simple mathematics. First, go talk to a few lenders and find out what is their own criteria for loaning cash for a business. Some will require 30% or 40% or it could be 50% as a down payment on the purchase of a business. Don’t state with them just get the details.
In that case, work your formula counter-clockwise, and when you have found this company you are interested in explain to the Seller that you’ll be a qualified Buyer and that you contain the needed funds available to buy a business with the normal degree of funds needed being <20% and that in today’s marketplace these lenders are requiring 35% as a down payment and you will have to have the Seller to carry 15% in the purchase for a limited moment. By this I mean to have the 15% amortized over the same time period of time as the lender is seeking, but agree to refinance the particular 15% in a shorter expression like 3 or a few years from the date in the purchase of the business.
Some Vendors will not like this idea and may not go along with it, yet a Seller who wants or perhaps needs to sell their enterprise understands that it is much better to find the bulk of their money now and possess the business sold than to just simply sit and wait in addition to hope that things are about to change later and still definitely not sell the business.
Good luck and allow this idea a try when you are really serious about buying your business and enjoy the vacation. It is all great.