In need of a loan to buy half an existing business.

Discussion in 'Growing and Managing a Business' started by DirtyGerdy, Apr 27, 2011.

  1. DirtyGerdy

    DirtyGerdy
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    I am wanting to purchase 50% ownership in an existing business. I currently have good credit, zero collateral, and have been working in the business for roughly 5 years. The purchase price is $150,000. I am trying to find information on how I can obtain that amount of money. I first asked about SBA loans but was told that in this case I could only qualify for one of the loans if I was purchasing 100% of the business. I understand I can ask friends or family...but I'm trying to gather all my options before doing so.

    Sorry in advance if I am asking some very basic questions. I am really just looking for some direction.

    Thanks!
     
  2. Fergal

    Fergal
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    Hi DirtyGerdy welcome to our Business Forum. What country are you based in? Have you tried contacting your bank? Have you written a business plan that outlines how you would move the business forward and make the returns required to repay the loan?
     
  3. ArcSine

    ArcSine
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    DG, congrats on this pursuit, and I hope it goes well for you.

    There are two related approaches which are sometimes appropriate in situations like yours. They're both variants on a general theme sometimes called "bootstrapping". Whether or not either one is suitable in a given scenario depends on the particulars of the situation.

    1. The existing owners ("Sellers") sell you half of their equity in exchange for your IOU. From that point on, your half of the profits are given to Sellers, to pay the interest and principle on the note, until the note is paid off.

    2. If the business has a strong balance sheet, the company itself takes out a loan and gives the proceeds to Sellers, in an amount that represents half of the value of the company. Simultaneously, the company issues stock to you such that you become a 50% owner, and in exchange you agree to use your half of the profits to pay off the corporate loan.

    Essentially the same results either way, for you, but the latter method puts the buyout cash into Sellers' hands immediately, rather than making them receive it via installment payments. (Although for tax reasons, Sellers may prefer the installment method.)

    Note too that these methods, or other variants thereof, can be mixed and matched. Suppose you're able to raise enough financing on your own to purchase 20% of the company's equity. You might then use a bootstrapping approach, as per above, for the other 30%.

    Best of luck with it!
     
  4. Fergal

    Fergal
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    Both of those approaches are very interesting ArcSine, in that they allow someone to become part owner of a business, without access to a large upfront investment. Are opportunities like that common in MBO situations?
     
  5. ArcSine

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    Aye, in fact MBOs and the bootstrap buy-in methods go together like cigars and cognac (i.e., a nice pairing, but also admitting the possibility of the occasional bad cigar!)

    Particularly with the first variant I mentioned, the buy-in party is being financed by the incumbent shareholder(s). If the buy-in party happens to also be members of the company's management---especially managers with a successful track record with the company---then...

    1. These buying-in managers are already a known quantity for the selling shareholders. One is more readily willing to offer financing to someone they've been seeing in action for a few years, as opposed to a total stranger.
    2. The speed with which the selling shareholders get paid off depends on the magnitude of the company's profits in the years following the deal. Again, with the managers being a familiar quantity, the sellers' uncertainty as to the speed and timing of their payout is reduced.
    3. Usually, the company's equity collateralizes the loan. In the event things don't work out, the selling shareholders will typically "repossess" that portion of the equity being acquired by management. If you're the selling shareholder, it's comforting to know that the collateral is being managed by people with experience in doing so, rather than inexperienced strangers who might run the collateral into the ground before you repo it.

    Also, it's not unusual for the selling shareholders to get a better price by selling to incumbent management rather than to outsiders. With their insiders' knowledge of the company, the managers typically don't have the same level of uncertainties and question marks concerning the company's future performance expectations that an outside buyer would. It's those uncertainties that cause the outside buyer to cap his willing price at some conservative ceiling. So to obtain that more favorable price, the selling shareholders are frequently willing to extend buy-in financing to the incumbent management team, in order to make the deal happen, and hence you've got the bootstrap deal I mentioned earlier.

    Cheers!
     
  6. Yanni

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    If everything you are saying is true, a financial business consultant can easily help you. Most financial consultants have relationships with banks that make it extremely easy for you. ; )
     
  7. Fergal

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    Thanks for the explanation ArcSine, I hadn't known that sales in MBO situations achieved higher prices in that way. You learn something new everyday.
     
  8. DirtyGerdy

    DirtyGerdy
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    I am based in southern california USA.

    Thank you all for the replies they are all very helpful. I have contacted my bank and looked into SBA loans but have had no luck. I am really frustrated as I know this decision is something I legitimately want to pursue, but I am (so far) unable to get the money and am running out of options. :/

    I think that I am going to look up a financial business consultant (as Yanni mentioned) and see what they have to offer.

    ArcSine, I will also do more research and look into everything that you posted. Thank you for spending the time to reply to my thread in detail. It is very appreciated.
     
  9. Fergal

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    Good luck with it all DirtyGerdy, please do post back in the future to let us know how it all works out for you, so that others can learn and benefit from your experience.
     
  10. jenniferhomes

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    There is certain private organization also who provides financing in acquiring a business. Last year when I acquired a business, I consulted one of my friend who is working with Investmentbank and he made my contact with one of such company and my problem was solved with minimum interest.
     
    #10 jenniferhomes, Sep 17, 2016
    Last edited: Sep 17, 2016

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