This article are provided for information purposes only, and are not intended as legal advice.


Buying a business – unrealistic expectation of third party financing

June 1st, 2009

There are many people who are looking to buy a business today but do not have sufficient cash to purchase the business that they would like to buy.  The business may not be suitable for bank financing therefore they go to the market and are looking for financing for their capital investment.  Time and time again people come to me and state that they want to buy a business with no money down, have no experience but if I can find the financing, they are willing to pay the investor a 10% return which is far greater than what they can get in the bank. 

 

Let’s look at this a little closer.  The buyer of the business has no experience, no money and they think that someone will provide them money with the expectation of a 10% return on capital is a good return.  Who is taking the risk?  The buyer is not because they have nothing in the transaction.  The investor is taking 100% of the risk.  If someone is taking the risk, what is the return that they are looking for?  Why would and investor give you 100% of the upside, zero of the downside when you are putting up no money?  People invested in Bernard Madoff because his investment sounded too good to be true, and it was.  If you cannot borrow from friends and family why would someone finance you?

 

Potential buyers of businesses are still trying to find someone who will finance them without taking any of the upside of the business.  Needless to say, I have never seen anyone get financing on this type of concept.  That is not to say that it is not possible but I have in my 30 years of business ever seen such a financing.  No one provides money for nothing.  If a person has money to invest, that means that they are more likely a sophisticated investor who has done well for themselves and is not looking for good investments.  If someone is providing the venture capital for the business, they will look for venture capital type returns which means that they will look for a significant equity position commencerate with the amount of cash invested by the buyer as well as an interest on their note receivable.  They may charge 10% interest on their loan but they may also ask for control of the business as well.

 

Remember, if you are looking for an investor think, if you had money, would you make this investment on the terms and conditions that you are asking?  If you would not, then maybe it is time to rethink your financing offer and make it more attractive to potential financiers whether they are angel investors or venture capitalists.


Filed under: Buy a business — Gary Landa @ 10:29 am


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