You’ve decided to buy a business, congratulations! Buying a business is a fantastic decision because entrepreneurship can be one of the most rewarding journeys you can take in life. It can also, however, be your worst nightmare. The difference between success and the nightmare scenario can come down to just two, very basic things.
YOU HAVE TO HAVE MONEY TO BUY A BUSINESS
Of course you need money to buy a business! This may seem like a silly thing to say, but a fair number of the people who come into the business market are working with little to no capital at all and expecting someone else to pick up the rest. These prospective buyers are relying on funding sources like family members, bank loans, Small Business Administration (SBA) loans and seller financing – but the fact of the matter is the small business world just doesn’t work that way.
You may have had a conversation or two with your well-off uncle or with your parents at Christmas about helping you get the money together to invest in a business, but we have quite literally never, ever seen one of these deals actually go through. Once you start the serious conversations about what dollar amounts you’ll be needing, how long it would realistically take you to pay them back – the checks never get written. If you are depending on a family member footing the bill for your business purchase – think again.
Even pre-recession it was tough to get a traditional lending institution like a bank to fund the purchase of a small business, but in the wake of all of that financial mess it is almost impossible to get a bank to approve a small business loan.
Yes, it is possible to get funding through the SBA to purchase a small business, but there are some very big hoops that need to be jumped through in order for this to happen. First, you as the buyer need to be approved, and if you don’t have a fair amount of capital to invest already – your chances of that approval are going to be slim to none. If you do manage to get approved, then the business itself will have to be vetted and approved – and like any lending institution post-recession, the SBA is going to be very conservative with how much they are going to lend, who they will lend it to and what businesses will even qualify for that buyer.
Yes, seller financing is extremely common – but what most first-time buyers don’t understand is that these deals usually mean the buyer is going to pay at least half, if not quite a bit more, of the purchase price up front. No seller is going to take a tiny down payment and hand you the keys, it involves way too much risk to be sensible on their part.
YOU HAVE TO BUY A BUSINESS YOU CAN AFFORD
Again, this might sound silly, but business buyers are usually caught up in the hopes that one of the capital-raising schemes we just mentioned will pan out and therefore look at businesses that are ridiculously out of reach. Think coming to the table with $30,000 and looking at businesses in the $500,000 range. Again – no family member is going to write you a check that big, banks will laugh, the SBA will never approve you or the business in that situation and sellers definitely won’t take you seriously.
Even if you could get, say, a family member to loan you the money to buy a business that far out of your current reach – you will be setting yourself up for failure. What new business buyers leave out of the equation is working capital – that is the money you need to both get the doors open under your ownership and then keep them open long enough to get the business turning a profit long enough to pay back your backers.
Just like renting a new apartment or buying a new house, there will be costs at closing that need to be paid – think deposits on a new commercial lease, deposits on utilities, first (and probably last) month’s rent, payroll and inventory starting the moment you take over, transfer fees for licensing, inspection fees – the list goes on and on. If all you have is $30,000 when you show up at closing to buy a $500,000 business, you probably won’t have enough working cash to even get the doors open.
If you only have a small amount of capital to invest in a business, that’s totally acceptable and doesn’t preclude you from business ownership! If you start small, with a $15,000-$20,000 business, you can grow that business into something larger. It just takes some time and some hard work. Many entrepreneurs start small and grow their businesses to a size they initially wanted, or some sell the business after a time for a profit and move up the business ladder that way. Either way, you will have a far better chance at success if you stay within your means. Don’t make the mistake of starting out underfunded!
Are you a business buyer who doesn’t have a lot of capital to invest? Are you curious about what’s out there in your price range? Ask us! Leave any comments or questions here and we would be happy to help.
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Fort Myers, FL 33907