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Business Opportunity Loan Strategies for Buying a Business

When obtaining a business opportunity loan, borrowers will discover that many lenders simply do not provide business loans that do not include real estate as part of the business purchase. There are several other important business financing issues to analyze prior to buying a business without commercial property.

Interest in buying business opportunity investments has improved because of serious problems with residential real estate. However, because there are so many critical differences between financing residential real estate and business financing, it is important for potential business owners to educate themselves before proceeding.

In order to buy a business, a commercial borrower is likely to need business financing. If the business includes commercial real estate, the borrower will need a commercial mortgage. If the business purchase does not involve real estate, a business borrower must use a business opportunity loan.

Unfortunately the availability of business opportunity financing is more restricted than commercial real estate financing. There are also some potential limitations and problems unique to a business opportunity loan, and commercial borrowers should make every effort to avoid these business financing difficulties.

Our goal here is to focus on several financing issues that you should anticipate when commercial real estate is not part of the business purchase. Our suggested approach to business opportunity financing is provided below.

Begin your business opportunity investment financing plans by formulating a realistic assessment of cash available for a down payment and desired maximum business purchase price. A down payment of about 25% is suggested for most business financing situations described here. Usually seller financing is permissible for a portion of the down payment, but a potential buyer generally needs to plan on investing at least 10% of the purchase price from their own funds even if the seller is providing 15% or more.

Because Small Business Administration loans are essential for this kind of financing, you should explore whether you will in fact be able to qualify for these specialized business loans. This step is both important and somewhat complicated, and the involvement of an SBA loan expert is strongly advised. Among the issues to explore are whether collateral is available for SBA financing and how important refinancing is to your overall business opportunity financing process.

It is important to consider the lease terms which are possible. As noted previously, business opportunity financing and investing does not involve the purchase of commercial real estate, so arrangements must be made for a long-term lease. The length of the lease is important because the normal business finance terms will restrict the length of business financing to the period covered by the lease (although you should anticipate a ten-year maximum for investment business loans). In other words, with a seven-year lease, the commercial loan is likely to be for seven years, and even with a fifteen-year lease, the commercial financing will probably expire in ten years.

Explore whether including real estate is a viable option or not in order to buy a business. With the inclusion of commercial property, you can obtain a longer business loan and the interest rate will be lower. Because the absence of a commercial mortgage can actually be an advantage, the improved terms possible by including real estate should not be looked at in isolation.

Discuss business finance options with a business opportunity loan expert before making any offers to buy a business investment. These discussions should include issues such as potential purchase price, down payment possibilities, seller financing, buyer credit scores, tax return requirements and collateral options.

Am I in the Right Business?

Are you tired of working constantly without a vacation and having the money to show for your efforts? If you are wondering whether you are in the right business, consider the following questions:

Do you know the ins and outs of your business?

Understanding the ins and outs of your business and the industry that your business is in is a crucial component that will determine whether you will be successful. Are you aware of the key metrics for your business success? If not, take a moment and complete a SWOT analysis. SWOT stands for strengths, weaknesses, opportunities and threats. Draw a T-chart on a blank sheet of paper and diagnose your current business successes and failures. If there is not enough opportunity and too many threats and weaknesses, you are potentially in the wrong business. If there are strengths and opportunities, revise your business plan to cater to these listed items.

Do you have a solid business plan?

Developing and executing a solid business plan is a crucial step toward ensuring that your business will become successful. Include accurate cash flow projects and forecasts for your expected profit so that you can review this information and make informed decisions about what your next business steps will be.

Are you spending time on non crucial tasks?

Choosing the core tasks to focus your energy on can be challenging. Many small business owners spend most of their time putting out fires and working in the business instead of strategically working on their businesses. Define the core tasks in your business that drive its bottom line and structure your schedule so that these tasks are dedicated the most time and that they receive daily priority. For more information on how to leverage your time, read my article called Leverage your Time and Use it More Effectively.

Do you know the business that you are in and have passion for it?

Lack of passion will almost surely cause business failure. Ensure that the business you are working on is something that you are familiar with and that you can fully get behind, as it is passion that will provide the needed energy to fuel the business toward success. When you are familiar with a particular industry or field, the training that you have received, the knowledge of the industry and the network that you have built will better enable you and your business to achieve success.

Choosing the right business to invest your time into can be challenging and if you are currently a small business owner who is not seeing the levels of success that you desire, as yourself these questions to reposition yourself for a higher chance of success moving forward. If you have not already signed up as a website member to receive valuable information such as this regularly, I encourage you to do so today.

Business Buying Basics – How To Select A Business For Purchase

There is no guarantee when buying a business that it comes with a sound set of financial information or that you will be able to make a success of it.

In a small to medium business, financial information is often a record of what the previous owner did, and consequently may not be a valid indicator of how you will perform in the same business. For example, unless you have experience in the hospitality business don’t buy a this type of business. If you have no experience in customer servicing, computer technology or a baking don’t buy these types of businesses just because the current or previous owner was profitable or successful.

Here are a few rules you reasonably follow when deciding what business to buy:

Selecting a business

Try to select a business where you have some level experience and or expertise. Business tends to be highly competitive; being at least as good as your opposition, will give the best advantage for staying in business and being successful. Select an occupation in which you enjoy the tasks and daily activities.

Owning and operating a business requires long hours, as well as great enthusiasm. Motivating your staff, and dealing successfully with clients for some can be quite a burden and may become tedious if you do not enjoy or do not have the propensity for these types of tasks.

Validate the sellers need to sell

Validate as best as you can, the owner’s reason for selling. While there are many legitimate reasons for selling a perfectly good business such as:

  • Retirement
  • Life changes such as marriage or additions to a family
  • Business “burn-out”

Sometimes, other reasons such as upcoming lease renewal issues, increased competition as well as many other negative factors may be the primary influence(s) of the pending sale. Having someone with experience working on your side will be advantageous to selecting the appropriate business for you to purchase.

Many businesses have problems; the trick is to know what they are, and create a strategy for dealing with them.

Financial Considerations and Implications

Try to understand and prepare for all financial implications of the business. This includes and is not limited to:

  • Capital required to run the business
  • Cost of purchasing the business
  • Capital to finance stock
  • Debts
  • Overheads.

Working capital requirements vary greatly between different business types: The financial requirements for a retail business are vastly different than those of a wholesaling business.

The cash flow characteristics of a business as well as any seasonality are of paramount concern. Profits shown in end of year accounts do not necessarily mean cash is available at critical times.

Necessary costs such as taxes, living expenses or advertising costs may produce a negative cash flow during a slow season. Try to leave enough financial reserves at start up for unforeseen expenditures and living expenses.

Some businesses may experience a downturn at change of ownership due to various reasons. Negotiating the previous owners limited continued involvement may help to lessen some of the impacts of new management/ownership issues.

Having the previous owner available until you “hit your stride” in running the business and/or the public/customers become “comfortable” with you as the new owner/manager may help lessen these impacts.

This does not imply avoiding the go ahead purchase of the business, but having plans and contingencies in dealing with these types of events may help in the success of the business.

Funding for the purchase, operation of the business, as well as any planned growth or development of the business should all be considered and qualified prior to making an offer for a business.

Staff Considerations

Meet any and all key employees prior to purchase. Knowing whether they intend to stay, or if there will be major personality clashes will give you additional insight on your start up issues. In some cases, sellers may not allow you to speak with employees until the purchase negotiations have advanced to contract signing.

To avoid this obstacle have your agent add appropriate provisions/contingencies in the purchase agreement.

Making Changes

Once purchased, new owners begin planning and making significant changes to the business. Try to avoid any major changes to the business during this period, unless you are 100% sure of what the outcome will be. Minimizing or implementing business changes slowly, will often effect a smoother transition and lessen the impact to your customers and your businesses success.

When purchasing an existing business, you are not only purchasing a physical location and inventory, but also the customers, good name and reputation of that business. Following the previous owner’s proven success methods, will offer you a significant advantage in making the business “Yours”.

Summary

Using qualified help, such as a commercial real estate agent or business broker during your search, investigation and purchase for a business will help to minimize many of the negative impacts of your purchase.

When buying a business, it is of great value to be diligent and honest with yourself in your assessments of the financial responsibilities as well as your own ability and areas of experience in running the business.

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