When you are looking to acquire an established and profitable business, there are many creative ways of financing your acquisition. Cash may be king, but let's face it -- leveraging your cash gives you much more purchasing power!
Retirement/401k Financing: There are several companies that assist buyers in using funds from their IRA, 401K, etc. for business acquisitions. They have specific programs that have been designed to comply with IRS regulations and this is an area where you definitely want to use professional services. There are certain procedures that must be followed and if not done correctly, you may be subject to taxes and early withdrawal penalties. However, this is a great option for people that want to invest in their own business instead of investing in the stock of other companies.
Portfolio Financing: If you have an investment portfolio that is worth more than the business you are acquiring , you may be able to obtain a loan using your portfolio as collateral. The benefit with this type of loan is that you are not required to liquidate any of your securities.
Seller Financing: Asking the Seller to finance your purchase is always an option. Just keep in mind that many Sellers want to retire and their business is their largest asset. The sale of the company is essentially funding their retirement. This means that carrying a note for you places a high risk on their future. Therefore, if you are going to ask the Seller to finance, understand that the Seller will generally want you to have more skin in the game than they have, so asking them to carry more than 50% is typically a losing proposition. In fact, in the past seven years, the largest seller note I've seen in any of our transactions has been about 30%.
Inventory Consignment: If the business you are buying has a substantial amount of inventory, it may be possible to reduce your acquisition cost by entering into a consignment agreement with the Seller for the inventory. This way, you will pay for the inventory only after it has been sold. A consignment agreement can be established for part or all of the inventory. For example, if there is $500,000 of inventory at cost, you may purchase $100,000 with the business acquisition and enter into a consignment agreement for the remaining $400,000.
These are a few of the ways you can creatively finance your business acquisition and there are many more. Depending on your assets, credit, contacts, and relationships, the possibilities are limitless.