Funding to Buy an Existing Business

Where the money usually comes from

Most small business purchases combine a buyer down payment, a loan from a bank or SBA lender, and a note from the seller.

No two deals look the same, but a common pattern for a small business purchase runs like this: the buyer puts in a down payment, a lender finances the largest portion against the business's cash flow and assets, and the seller carries a note for part of the price. Sellers like a quick close, but they also like getting the price they want, so a seller note is often what bridges the gap.

Illustrative example for a $500,000 purchase. Buyer cash: $75,000. Seller note: $75,000 paid over five years. Outside loan: $350,000. The seller's willingness to carry a note also signals confidence in the business, which lenders notice.

Required down payment, term and eligibility vary by lender and program. Ask each lender for current requirements, and check the SBA's own pages if you pursue an SBA-backed loan.

What ROI Funder does and does not place

ROI Funder does not place acquisition loans or startup loans, but it can help an existing business with working capital, term loans, lines of credit and equipment financing.

Be clear about the line. Purchase-price financing is a specialty. Banks and SBA lenders handle it, looking at the target business's tax returns, valuation and your experience. Our guide to acquisition loans explains how that product works, what it costs and what lenders require.

Where ROI Funder fits is around the deal:

• After closing. New owners often need working capital for payroll, inventory or repairs in the first months.
• Equipment. If the purchase leaves equipment needs, equipment financing can handle them.
• Existing business as buyer. If your current company with 6+ months of operation and $20,000+ monthly revenue buys another, financing for the buying company's own needs may be possible, but not purchase-price loans.

Do the diligence before the financing

Verify revenue against tax returns and bank statements, review customer concentration and confirm what actually transfers with the sale.

Lenders will check, and so should you. A checklist:

1. Revenue and profit. Match the seller's numbers to tax returns and bank deposits for at least two to three years.
2. Add-backs. Sellers adjust profit for personal expenses. Question each one.
3. Customer concentration. If one customer is a third of sales, the risk is large.
4. Leases and licenses. Confirm the landlord will transfer the lease and licenses can move to you.
5. Liabilities. Know what you assume in an asset deal versus a stock deal. Ask your attorney.
6. Key people. Employees, vendors and relationships that may not stay.

An accountant and an attorney with small business deal experience are worth the fees.

Will the business pay for itself?

Check that the business's cash flow after paying you a fair salary covers the debt payments with room to spare.

Lenders call this debt service coverage, and a lender wants cash flow comfortably above payments. You should want the same.

Example, illustrative: the business generates $180,000 a year in cash flow before owner pay. You need $70,000 for yourself. That leaves $110,000 to service debt. On the $350,000 loan and $75,000 seller note, payments might total $8,000 a month, or $96,000 a year. The cushion is $14,000. That is thin. A 10% revenue drop could erase it.

If the numbers are tight, negotiate a lower price, a bigger seller note or a longer term. Use the revenue-to-payments guide to test your own deal.

The first 90 days after closing

Plan a cash reserve for the transition, because customers, suppliers and staff may all react to the ownership change.

New owners often run short of cash in the first quarter. Vendors may tighten terms. Some customers wait to see how things change. A key employee may leave. Meanwhile you may find repairs the seller did not mention.

Keep working capital outside the purchase price. Options include a line of credit, which can be arranged for an operating business based on its bank statements, and savings. Ask the seller for a transition period of consulting or training, written into the agreement.

ROI Funder funds from $5,000 to $5,000,000 with a soft credit pull to apply, and you can ask about options once the business has its own bank history under your ownership.

Buying versus starting from scratch

Buying brings existing customers and cash flow at a price, while starting costs less up front but takes longer to earn.

An existing business has customers, systems, reputation and a revenue history that lenders can evaluate. You pay for those in the purchase price, and you inherit any problems. Starting from scratch costs less to open but carries a longer ramp and no history to borrow against. Businesses under six months old generally do not qualify for ROI Funder products.

Neither is better in the abstract. A well-priced purchase of a steady business can reduce risk. An overpriced one can sink you. Price, diligence and your own experience in the industry decide the outcome.