How To Get Financing To Buy A Small Business

How to get financing to buy a small business. So I love this topic. I love small businesses. I got into buying and selling companies around 2003, four or five. I had done so many fix and flips and property deals in the real estate sector. I'm thinking, why not buy service-based businesses, pizzerias, hair salons, nail salons. I mean, I went a little bit crazy buying service-based companies. They're easy to turn. They're easy to influence and create cashflow like hair salons, easy double, triple nail salons. I mean, it's not even restaurants now with all of the digital marketing and the texting and the reminders. It's so much easier to increase your cashflow. So let's talk specifically about financing for your new small business. Number one, how do you actually acquire a business using minimal cash? What are some of the due diligence principles that even buying a company? The second thing is the strategies to think about getting your best result in financing. And the last are all the common pitfalls that we see in the acquisition of a small business. So get a pen and paper, those of you who are serious about it, because some of you that are high income earners, buying a small business and going straight into someone else's cashflow is a great model versus bootstrapping and growing it from scratch. It's up to you who you are. I'm a bootstrapper. I know how to make really fast cash. I can do it in a day. I can do it in an hour. Some of you have never run a company and being an entrepreneur is tough. So you may want to consider franchising. In fact, if you want an appointment with our team, it's in the link below. Ask for a gap analysis. We have franchise experts who can actually select. Right now we're in the process of helping some people close franchises in Texas in the vending machines. We have the Tudor Doctor closing in Arkansas. We have Subway's closing in Indiana, Ohio. So we're helping a variety of people sort out what's best for them and the kind of franchise they might want to buy. That same team, which includes me, looks at just other M&A. Do you want to merge, acquire? What do you want? So as you're looking at financing, obviously you want the least amount down, but you've also got a cashflow given your payments. If you can, leverage some seller financing. It's better for them. It's better for you in the tax category. So if you just came in in a lump sum and bought them out, they'll pay the most tax. If you pay them out over three to five years, which also allows you to get in and it's more of a little bit of a convertible performance to see if everything is what it was when you actually agreed to buy it and have some negotiating points in those contracts. When you buy a company, I can tell you, you better have the right contracts lawyer on your side, structure, corporate structure. Sometimes you just buy the business. Sometimes you buy the entity with the business in it and the whole corporate structure. And again, there's pros and cons of taking on the past liability indemnification clauses. More importantly, if you are in need of keeping the person who generated the business in business, then you want to do more of a seller financing. They can go out over the next 12, 18, 24, 36 months. Other kinds of financing obviously is SBA, traditional financing. If you have good credit, we could get you anywhere between a hundred to $150,000. You could buy some franchising, especially vending businesses aren't expensive to buy. You could buy them, but the reason it's a franchise, because you're buying some great locations that are already cash flowing. The last, how to finance, the last point that I want to talk about on how to finance a small business is I'm going to call it your friends and family capital rates. If you're in a job, again, you could probably borrow up to 50,000 from your 401k to use that money as a down payment. You would also borrow from other people that you know have a 401k and are tired of tiny little returns and want a convertible note or some sort of note. Pay them 8, 10, 12% for that money. They can probably only loan you 50,000 out of their 401k if they're active in business. So what are the strategies to get the best financing? It's all the devils in the details. It's in those contracts, making sure that you really handle prepayment penalties, buy-sell agreements, full completion of contractual arrangements, where the business you're buying from has things in it, in its P&L balance sheet, like vehicles, like equipment that you're not going to continue or take on or bring your own in. Those all have to be negotiated out. So whenever you're looking at buying and selling a company, you typically want three years of really good, almost forensic level accounting because so many people add in a lot of expenses that are more really what would be considered ITOL and their family's operating expense, not the business's. If you're going into buy or sell, especially if you're the one that's going to sell, keep your books clean because if you know you're going to sell, don't add in all of what I call the lifestyle deductions that we know you can get with 81,000 pages of tax code. You want to just keep it a clean business that's easy to look at, easy to audit in and out. And if you actually are taking cash from the businesses, I've seen this in a lot of restaurant situations, obviously the marijuana business, you've got to report it. You've got to report true incomes or off balance sheet incomes and off cashflow incomes of how much did they really take home and is that available? Because a lot of times you're going see small business owners have like these little hookup relationships that once you buy it, those aren't available to you unless that's part of the transition. So again, is it in the contract that they introduce you to other vendors or suppliers and their customers and do a really good turnover? Now, before we go to the last point on how to finance a small business, and I love getting into businesses and helping you look at them or even sell yours, I want you to subscribe to our channel. Once you're five days a week, click the notification button and share this with five or 10 friends. The people you hang out with influence you a lot. So if you're in the business of looking for business, looking for real estate, and they're like, oh, you can't do that. You need to level up your whole group of people you're hanging out with. You don't want to do this alone. I have had mentors since I was 17 years old. That was just a minute ago. And you need somebody to guide you. If you've never done this, why would you risk doing it for your first time alone without experts? I have bought and sold over a hundred companies, done over a thousand real estate deals. I've done a lot in my career and it's time for you to pick up and do some. So the big pitfalls that I see, again, is you don't get a contracts lawyer. You just trust the one side to deliver you paperwork and you're not thinking through enough stuff. I constantly see people not pay attention to the tax side of it or the insurance side of it. Those are vital to you. Again, corporate structure, does it come with the asset or are you just buying the asset out of the company? So be cautious in equity deals, because again, equity is an all in play, meaning it's going to work. Everybody wins. If it doesn't work, everybody's going to go down and even potentially have to hit a bankruptcy button. That's why I like convertible money as far as financing, because you may not want to have some partner later on that you have to buy out later on. And control the entire asset on the buy, meaning the mailbox, the mailbox keys, the URLs, every piece of asset you need administrative controls. All that is part of the devil, like I said, the devil's in the details of those contracts of what's turned over to you. I've seen it more in real estate companies than anywhere else where people are delivering their rent checks to mailboxes and the keys weren't turned over and you started your own new mailbox and you've got rent checks from before. So make sure you button up every piece of this asset, cashflow balance sheet, income statement that you can as you go into buy and finance. If you have any questions, go to askLaurel.com, A-S-K-L-O-R-A-L. You can also just call our office, get a gap analysis, say, I want Laurel and her team to help me finance and buy a company and get in the franchise business. We're here all the time to help you be successful.