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From the category archives: Certified Business Brokers News

Don't you wish financing a business could be easy? Well, keep these important tips and tools handy to have a smooth buying experience.

Earnouts In The Time of COVID-19 is a Win-Win

An earnout is a type of payment agreement which is sometimes used in a business acquisition. An earnout is a buyer's commitment to pay the seller a certain amount of the money tied to future performance after a sale. Under an earnout agreement, the seller receives part of the purchase price up front, and additional funds over time. The terms of the earnout are written into the sales contract.

Earnouts will probably play a bigger part of deal structure in the months ahead.  If business recovers, buyers and sellers both come out winners.

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How to Buy a Business Using Retirement Funds, and NOT Pay a Penalty Tax

  You can use funds from qualified retirement accounts such as 401(k), 403(b), pension, profit sharing, and IRA rollovers to start or buy a business with no taxes, no penalties, no loan repayment and no hassle. Will I pay tax or penalties if I use retirement funds to buy a business? Not if you use qualified money correctly. Qualified money is money with a tax beneficial wrapper around it because it was accumulated in a tax-benefited plan. Many people have been building retirement accounts with much of their money in qualified retirement vehicles like an IRA or 401k. If these accounts are improperly accessed (“unwrapped"), they stand to be hit with up to a 50% tax penalty in state and federal income taxes, depending on tax bracket and state of residence. So, the question to be answered is, "How can a person access their retirement funds to purchase a business without paying a penalty or income tax?" How to Use Retirement Funds to Buy a Business Without Penalty There are three p ...

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Buying Or Selling A Business? -- Is It SBA Financeable?

There is a general misconception in the small-business acquisition marketplace that a person could easily purchase any type of business through the SBA with a low down payment and get a loan for the rest. Most people also believe that SBA loans are a major source of small business financing. But data shows that SBA-guaranteed loans make up a small portion of the value of the overall small business lending market.

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You Can Purchase a Business Using Retirement Funds

Don't let your retirement dollars idle away! Put your money to work! Invest it in your own business and let your money work for you!

You can use cash from your 401(k) or IRA account to purchase a business without incurring early distribution penalties, with no taxes, no loan repayment, and no hassle.

For example, a Texas resident using $100,000 from a qualified retirement fund can keep the extra 31% that would have been paid in taxes, leaving an additional $31,000 to fund the new business by adopting a transfer trust plan versus withdrawing the funds outright.

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Financing and Tax Implications of Selling Your Business

Taking the time to research the financing and tax implications of a sale can provide you with a strong advantage come negotiation time.

Before you can understand the importance of negotiating a final small business sale agreement, it pays to brush up on facts about how sales are financed and how proceeds are taxed. Why? Because every decision regarding the payment structure affects when and how money transfers from the buyer to the seller and how the payments are taxed.

No one is asking you to become a financing or tax pro. That's what your sale advisors do, and you'll want to call on their advice through every step from here through to the closing of your deal and the transition of your business to its new owner.

But knowing some basic information will help you understand the advice you're receiving from those who are trained and up-to-date on the legal, financial, and tax implications of small business sales.

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Is Lending for Business Acquisitions Back to Normal?

This is the question I get more than any other and my answer is YES, Absolutely Yes!! My answer may surprise you, and some may even want to argue, but if you have been in the lending or business brokerage industry for more than 6 or 7 years I think you will agree. When I look back to the 1990's and early 2000's when I was asked, "What does it take to get a business acquisition loan?" I would tell them a borrower must be able to CONVINCE the lender of the following: The ability and willingness to pay all of their obligations on time. The specific experience needed to own and run the business. They had enough cash to make a substantial investment into the business. They had some tangible assets to back the loan should things go bad. Today when I am asked "What does it take to get a business acquisition loan?" I tell buyers and brokers exactly what I did 10 and 15 years ago. The trouble with many individuals today is they are sitting around waiting for things to get back ...

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How are Payables and Receivables Handled When Selling or Buying a Business?

While all transactions are as unique as the parties involved, in most small business sale transactions the seller keeps the cash and outstanding receivables. They pay off the bills and any other outstanding payables and deliver the business free and clear of debt to the buyer.

In somewhat larger business sale transactions, there are many reasons why buyers consider acquiring the receivables.

 

  • Purchasing the accounts receivable offers the buyer the advantages of having control over the collection of the receivables and continued cash flow from the business, thereby removing the need to acquire additional working capital.
  • By acquiring the receivables the buyer immediately begins dealing directly with the most important element of the business - its customers.
  • The sale of the accounts receivable also offers the seller a clean break from the business and the ability to cash out. This approach leaves no open-ended accounting issues after closing.
  • Valuing the receivables depends on the future risk and resources necessary to collect the outstanding receivables. Therefore, the aging report of the accounts receivable would ordinarily be reviewed for history of late paying or uncollectible accounts so both buyer and seller could come to agreement on what should be paid for the outstanding receivables by the buyer.

Payables incurred prior to the transaction date is sometimes negotiated to suit the circumstances of the particular transaction, whereby the responsibility for the payables is sometimes considered by a buyer.

 

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How Much Cash is Required to Buy a Business?

This is one of the most frequent questions we get from those who want to buy a business. Not all ask that question, however, but should.

Since most people only buy a business once in their lifetime, they do not know how much it would take to acquire a business that would fulfill their dreams.

So, how much liquid funds do you need to put a down-payment on a business and how much do you need to close on the deal?  A short answer to this question is this. Businesses vary a great deal in price and is down-payment driven.  The higher the amount of down payment you have, the more likely you will be able to find a business that meets your needs.


These are the two cash requirements to think about when you start shopping for a business.

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Understanding Seller Financing in a Business Sale

Business owners who extend financing to a buyer for the purchase of their business often ask, "What happens if the purchaser defaults on the loan?" Should that happen, the seller would be able to exercise whatever rights are defined in the security agreement that is associated with the promissory note. The seller would usually have the right to get the business back, which may not always be the best scenario if the business has declined under the buyer's management and is not performing well. In addition, if the buyer is using the business' assets to get a bank loan, the seller will have to take a second position behind the bank. A seller should try to negotiate a personal guarantee by the buyer as part of the terms of the promissory note. The seller can also require the new owner to provide periodic financial reports on the performance of the business as part of the terms of the promissory note.

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Valuation - The First Step Towards Selling Your Business

Just as an athlete might get a physical to determine their preparedness for a marathon, you should also measure your Company's fitness for the marketplace. A valuation is an unbiased examination of your company's marketability and helps you pinpoint where your company is in its business cycle. It is the foundation, the meat and bones, on which a business owner can base their readiness to sell.

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Earnouts - How and Why are They Used in a Business Acquisition?

An earnout is a type of payment agreement which is sometimes used in a business acquisition. Under an earnout agreement, the seller receives part of the purchase price up front, and additional funds over time. The terms of the earnout are written into the sales contract.

An earnout can be used for different reasons:

To tie the acquisition payout to future performance

An earnout, in a business acquisition context, is an arrangement in which the buyer doesn't pay the entire purchase price up front but agrees to pay a certain amount now and more later depending on how well the business performs in the future.

To bridge the pricing gap

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SBA Loans are Misunderstood These Days - Most Require Collateral

We get email alerts every other week or so from the SBA saying that the 7A guaranteed loan program for buying a business only requires a proven history of stable cash flow that can support the debt payments, which means that goodwill (an intangible asset) can be used as collateral. These SBA email updates also tout that banks using this loan will be backed by the SBA with a 90% guarantee. If the loan defaults, the bank would only be responsible for 10% of the default value, the government would cover the rest. However, this has not been the case in reality, just the opposite is true. Many banks are requiring a high-percentage collateralization of any SBA guaranteed loan in tangible assets such as real estate, equipment, inventory, and accounts receivable. The reason for this disconnect is that banks want more than just the government guarantee these days. They are being more careful and want more security. Many businesses do not have enough hard assets to cover a loan and real estate values aren't cutti ...

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Buy a Business Using Retirement Funds

Put your money to work! Invest it in your own business and let your money work for you! You can use cash from your 401(k) or IRA account to purchase a business without incurring early distribution penalties, with no taxes, no loan repayment, and no hassle. For example, a Texas resident using $100,000 from a qualified retirement fund can keep the extra 31% that would have been paid in taxes, leaving an additional $31,000 to fund the new business by adopting a transfer trust plan versus withdrawing the funds outright. With the adoption of a pension transfer trust, you are allowed to convert 401(k) and IRA funds into privately-held stock in your new business. Pension and tax advisors can provide all the specific components necessary to make sure the transaction is in compliance with all applicable IRS Code Sections, ERISA Law, and Department of Labor Letter Rulings. We can refer you to a reputable representative. For more complete information on using qualified retirement funds to purchase a business, ...

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Friends and Family: A Financing Option for Buying a Business

The first job facing many prospective business owners is rounding up the cash necessary to make the purchase. They may find that banks have made borrowing difficult (or all but impossible), and that even SBA loans have requirements too stringent to meet. One viable option is obtaining financing from the seller; another is to seek help from family and friends. Borrowing money from family members and/or friends is one of the most frequently-used methods of small business financing. The pluses are obvious--there is trust, familiarity, and a general comfort level when dealing with those you know. The drawbacks are self-evident as well: "doing business" with family and friends comes with cautionary notes of legendary proportions. Everybody knows that family ventures can be complex and stressful, stirring up "bad blood" and lingering ill will. However, by taking the right preventive steps, buyers can take advantage of friendly financial help. 1. Set up an informal meeting to introduce your ideas. This is t ...

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SBA Legislation Special Update

Extension of SBA Recovery Lending Programs Will Support $1.8 Billion in Small Business Lending Agency plans to restart Recovery loan approvals on March 10 WASHINGTON – President Barack Obama signed legislation Tuesday extending until March 28 the U.S. Small Business Administration’s ability to provide small business loans that are enhanced with special provisions of the American Recovery and Reinvestment Act (ARRA), including a higher guarantee of SBA-backed loans and a waiver of loan fees normally paid by borrowers. SBA estimates the additional funding will support about $1.8 billion in small business lending. New approvals of eligible loans with the higher guarantee and reduced fees made possible by the Recovery Act are expected to resume on March 10. Loan applications from borrowers in SBA’s Recovery Loan Queue will be funded first, followed by new loan applications. “These key loan programs have been successful in helping jump-start the economic recovery for America& ...

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SBA Update - What's Happening in Congress

On Thursday December 10th, Sens. Landrieu and Snowe introduced S. 2869, the Small Business Job Creation and Access to Capital Act. This new bill contains a series of measures that were separately introduced by Sens. Landrieu and Snowe earlier this year. The Senate Small Business Committee will mark up S. 2869 Thursday, December 17th. Highlights of the legislation include: Increase the loan limit on 7(a) loans from $2 million to $5 million. Increase the loan limit on 504 loans from $1.5 million to $5.5 million. Increase the loan limit on microloans from $35,000 to $50,000. Allow the 504 loan program to refinance short-term commercial real estate debt into, long-term, fixed rate loans. Extend the authorization to provide 90 percent guarantees on 7(a) loans and fee elimination for borrowers on 7(a) and 504 loans through December 31, 2010. Direct the SBA to create a website where small businesses can identify lenders in their communities. Increases the maximum guaran ...

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The Five C's of Credit Analysis for Getting a Loan for Buying a Business

If you are buying a business and plan to obtain financing from a lending institution, these five tips provided by Adeline Rem, Regional Vice President of Celtic Bank, will be helpful in getting your loan approved. 1. Capacity The capacity of the borrower to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships -- personal or commercial -- is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment. 2. Capital Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective lenders and investors will expect you to have contributed from your own assets and to ...

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SBA Loans for Small Business Acquisitions Improving

The Small Business Administration today announced their support of the Federal Reserve Bank of New York and the Treasury Department to improve the TALF Program, which will help unclog the secondary market for asset-backed securities, including SBA 7(a) backed loans which is the vehicle used for small business acquisitions. “We are pleased that terms for SBA loans are continuing to improve, and TALF is moving into the implementation stage where loans will be made,” said SBA Acting Administrator Darryl K. Hairston. “SBA welcomes the recent announcement from TALF and supports its continued efforts to modify the terms to help unfreeze the secondary market for SBA loans, thus making it easier for our lending partners to make new loans to America’s small businesses.” “Three specific changes should be especially helpful to the secondary market for SBA loans. The lower collateral requirements for pools with longer expected lives; the creation of a federal funds-based rate; ...

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Private Equity Groups are Hunting for Business Acquisitions

Private Equity Groups have excess capital to invest and are looking for business acquisitions. One of the major market shifts for the acquisition of privately-held companies has been the growth in the number of Private Equity Groups (PEGs) over the last decade, they number in the thousands. PEGs have become key players in business acquisitions. They offer flexibility as a liquidity source, giving entrepreneurs the ability to take some cash off the table, recapitalize their company or simply sell and move on. Private equity refers to buyout groups that seek to acquire ongoing, profitable businesses that demonstrate growth potential. The private equity market had traditionally been restricted to acquiring larger companies. But increased competition for those larger operations, the greater growth potential of smaller firms, and an easier path to exiting the investment of smaller firms in the future have played a role in attracting PEGs to smaller companies. PEGs are typically organized as limit ...

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Buying or Selling a Business During Tough Times

With negative economic news grabbing the headlines in the United States, business owners may think it is not a good time to sell their company. But fortunately for owners looking to sell, that is not necessarily true. Business sales are still taking place with sellers capturing attractive prices and favorable terms, when the deal is structured properly. One of the the most important foundations of constructing a successful deal has always been a solid buyer, one that is creditworthy. Whether it is an individual, another company, or a Private Equity Group, qualifying criteria are demonstrated business acumen, significant assets to pledge as collateral, or a committed fund behind them. With a proven, credible buyer at the negotiating table, lenders are more likely to support the transaction. In today's environment, some seller financing should be expected to get the deal done. It is not uncommon during a tight economy that sellers must share the risks with the buyer and the lender in order to achieve ...

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Credit Crunch and SBA Lending for Small Business Acquisitions

Despite the current credit crunch, well capitalized community banks still have money to lend for business acquisitions. The SBA 7(a) loan program is an excellent way for both bank and borrower to tread through this troubled business environment. While many large financial institutions are licking their wounds from the mortgage mess and the credit market contraction, community banks who are well capitalized and who traditionally don’t participate in these arenas are still a viable source of funds for small business acquisitions. Because SBA loans have features that reduce risk for banks, they are a valued tool for banks in this environment. And because they offer lower down payments and longer terms, the resulting lower monthly payments are attractive to borrowers. The US Small Business Administration (SBA) enables private lenders to make loans that they ordinarily would not be able to make by guaranteeing that a portion of the loan proceeds will be repaid to the lender in the event of a default ...

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Build a Business Plan When You Buy A Business

An essential part of any business is its plan for success. Your business plan lays the foundation and groundwork for your new venture.

Business Plans are a standard requirement by lending institutions, including SBA lenders, when pursuing financing for a business acquisition. However, business plans should be looked at as part of the bigger picture, as an architectural blueprint, the guide that will elevate your enterprise to the level you envision.

The discipline of constructing a business plan gives you the opportunity to examine and understand the challenges ahead and generate realistic expectations for your new business. This involves cohesively organizing your business ideas and financial needs and aligning them with detailed marketing and management plans that conform to your budgetary constrictions.

How far ahead should business plans look? A three year prospectus is standard since circumstances can change over long periods of time. Business plans should also include contingency plans since investors or lenders will want to know how the company will continue operations should something happen to the owner.

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Indo-American Chamber of Commerce Presents Small Business Success Series

The Indo-American Chamber of Commerce of Greater Houston (IACCGH), as part of their Small Business Success Series, will be hosting a moderated dinner event at Bombay Brasserie Restaurant in Houston, Texas, on June 24, 2008. Tara Energy, headquartered in Houston and one of the largest independent retail electricity providers in Texas, is sponsoring the event. Frank Stabler, CEO of Certified Business Brokers (CBB), has been invited to serve as a distinguished panelist for the event to answer questions on the following topics: How To Sell Your Business How To Buy An Existing Business How To Finance Your Business and other related questions from guests and attendees Since 1999 the IACCGH has been a powerful advocate and important resource for businesses looking to capitalize on the tremendous opportunities presented through international trade. This organization has made a significant impact on the rich, diverse and prosperous Houston economy. For more information about this e ...

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Buying an Existing Business Beats Starting a Franchise

Last Friday afternoon I was a guest on KSEV Radio AM 700 with host Aubrey Thoede and had the opportunity to discuss a subject that many call-in listeners wanted to learn more about....starting their own franchise. But buying a new franchise is not the best way to go about achieving the "American Dream." Everyone reads or hears about big corporate mergers and large company acquisitions. However, big corporations aren't the only companies being bought and sold. Profitable, privately-held small businesses are changing hands everyday. These transactions are done behind the scenes and are not reported along with the daily stock market news. These business exchanges fly under the radar of the public at large -- which may be part of the reason that it is not commonly understood that buying an existing small business is the most viable path to being a successful business owner. If you are considering your options for going into business for yourself, buying an already established profitable business should be t ...

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Buying A Small Business - Get Prequalified For Financing

Get Reviewed and Prequalified For Financing So You Can Leverage Your Business Purchase. Getting prequalified for financing by lenders is very important for two specific reasons. 1) 90% of all small businesses sold have some form of financing involved. 2) One of the biggest reasons that deals falls through is because the buyer could not obtain financing. While some sellers are willing to provide partial financing to a qualified buyer, they would much rather the buyer be able to get third party financing so they can receive their cash up front at closing. Wouldn't you? The seller takes a considerable risk on a buyer he doesn't know too well and can only hope that the buyer will be successful in running the operation. The usual cash injection (down payment) required by SBA and other lenders in the purchase of a small business is generally around 20% to 30% and the rest is financed. This, of course, is based on your personal financial standing and background. You will need to submit personal fina ...

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Sell Your Business Faster - Prequalify it for Bank Financing

Business Owners Should Prequalify Their Business For Potential Buyers Before Putting It On the Market. Whenever we advise our business-owner clients this, they look at us sideways wondering if we have lost our minds! They usually reply, "isn't it the buyers responsibility to get prequalified and get financing for the purchase of my business?" Nothing could be further from the truth. It makes good sense for business owners to have their business financial records, tax returns, deal structure, and price reviewed by lending institutions before marketing the business to prospective buyers for several reasons. 1. Based on the financials and tax returns from the previous three years you need to know if your business is eligible for potential buyers to get a loan to buy your business. If you know that your business is not eligible for financing, then you know that the deal structure for selling your business will be very different without bank financing involved. 2. You also won't waste time with buyer ...

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Small Business Loans Hit Record Breaking Levels in 2007

The U.S. Small Business Administration posted record-breaking loan numbers again in FY 2007, expanding access to capital to thousands of entrepreneurs across America and setting records for both the combined number and dollar volume of loans, according to their News Release today.SBA approved 110,275 loans totaling more than $20.6 billion under its two primary small business loan programs during the 12 months ending on Sept.30 2007, compared with 107,233 loans worth $20.25 billion in 2006. With the strong results in 2007, the combined outstanding loan balances in the 7(a) and 504 loan programs increased 6.5 percent to $66.7 billion. The total does not include an additional $2.65 billion in venture capital funding provided by SBA-licensed Small Business Investment Companies to more than 2,000 small businesses.The SBA plays an increasingly vital role in enabling small businesses across the country to get the capital they need to buy and grow their businesses, create jobs and build their communities. Although SB ...

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To Build, To Franchise, or to Buy an Existing Business......That is the Question

Should you be the architect of a new business and start from scratch, buy a new franchise, or buy an established existing business? Every year, thousands of people consider going into business for themselves and these are the three routes to get there. Each course has advantages and disadvantages that one should consider.

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The 1031 Exchange -- Sell Business Property Now, Pay Tax Later

A growing number of investors are selling properties and paying taxes later through a deal structure called a 1031 exchange. Section 1031 of the U.S. Tax Code permits a seller of commercial properties to defer the capital gains obligation if it identifies a replacement property within 45 days of closing the sale. The seller must then close on its new purchase within 180 days of the first closing. In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date. Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a business owner who has outgrown a company-owned building, for example, can defer the tax liability as long as the proceeds are used to buy another building of equal or greater value within a spe ...

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Who Would Be the Buyer of Your Small Business? Part 1

The Individual Buyer Category represents the largest number of prospective buyers for small to midsize privately-held businesses. Understanding who the buyers are and their acquisition criteria will enable business owners to be better prepared when the time comes to sell. The individual buyer category encompasses a variety of buyer types that include wealthy individuals, corporate executives, engineers and salespeople working for large firms, and immigrants entrepreneurs who have recently moved to the US. There are two other buyer categories that will be discussed in a future post: Financial Buyers (sometimes called investment buyers) and Synergistic buyers. Each buyer category differs in their purpose for making an acquisition and the types of businesses they target. Wealthy Individuals often are people who have taken early retirement from corporate America and after a brief period of being nonproductive decide to get into their own business. They tend to acquire midsize companies grossing in excess of ...

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Small Business Owners: Prequalify Your Business for a SBA Loan Early in the Selling Process

SBA prequalified businesses get more attention in the businesses-for-sale marketplace because it saves potential buyers a lot of effort and time to secure financing. More importantly, however, they know the business is financially sound. The more interest generated in your business, the better the chances for a quicker sale.

If your business is eligible for SBA financing, it will usually get a higher price.....especially if you provide a small amount of additional financing to the buyer. It makes the buyer feel more secure about purchasing your business knowing that you have enough confidence in the performance of the business to provide a loan. Or, based on the buyer's financial capabilities, you may get all cash instead of having to provide any portion of the financing yourself.

When your business is prequalified for financing, you will also get advice on what types of buyers would be approved for financing for your type of business, potential terms, and deal structure. You will also get a Letter of Prequalification you can present to qualified potential buyers.

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Seller Financing in a Small Business Sale

Most sellers are unaware of how much the interest on the sale increases their actual selling price. For example, a seller carry-back note at eight percent carried over nine years will actually double the amount carried. $100,000 at eight percent over a nine year period results in the seller receiving $200,000.

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