If you’re thinking about trying to sell an online business or possibly buy one in the near future, it’s important to be aware of the trends in small business acquisition financing. In other words, you need to keep abreast of how other entrepreneurs are paying for companies that they want to purchase.
Why does it matter to you? Well, if you’re hoping to soon be a seller, you’ll want to have some feel for how your prospective buyers are likely to pay. If sellers are likely to go through a bank or take advantage of a government program to obtain financing, you’ll need extra clean, organized financial information to present to them. For prospective buyers, knowing how people are currently paying to purchase businesses will help you assess whether or not you’ll have access to funds.
Here are some of the current trends:
1. Fewer Buyers Are Using Their Own Money. During the recession, most people who were buying businesses were using their own funds for acquisitions. This was due primarily to the fact that lenders had tightened up requirements so much that the only option was to dip into one’s personal savings. This is particularly true for online businesses, which tend to be less attractive to financial institutions, as they typically don’t have many tangible assets like real estate and equipment. With the economy on the rebound, we’re now seeing a shift toward outside funding with more entrepreneurs keeping their own money in the bank.
2. SBA Loans Are Becoming More Common. SBA loans are government-backed loans, but they still are funded by financial institutions. This means that borrowers must still meet lending criteria established by banks in order to get an SBA loan. Even if they qualify for the program, they may not qualify for the loan. During the recession, that was the situation most people found themselves in, and SBA loans were not common sources of funds for business acquisitions. 2014 set a record for increases in SBA loan growth with a 12 percent rise in the number of government-backed loans.
3. Lenders Are Lending Again. Tied in to both number one and number two is the fact that lenders are lending again. The economy has rebounded in most areas and in some parts of the country is starting to grow once again. Lenders are responding by relaxing some of their lending criteria; however, it is still more difficult to get a loan to purchase a business than it was before the housing bubble burst. The most attractive deals to banks are those that include a sizable down-payment from the buyer and SBA backing.
4. Retirement Money Is Going Into Businesses. A new trend is emerging in the world of business acquisition–401k funding. Individuals who have retirement plans can in many cases use those funds to buy a new business if they structure the deal correctly. To accomplish the sale without penalty, they must use their 401k money to purchase the shares of the business being acquired. This is referred to as Rollovers as Business Start Ups. When the economy was shaky, most experts cautioned against this due to the very real risk of losing one’s retirement; however, now that the economy is beginning to grow, some people are deciding to take the gamble and invest their retirements into new ventures.
5. Savings Is Still Tops. Even though SBA loans are becoming more popular and buyers are using retirement moneys to fund business purchases, personal savings is still the most common source of funding for acquisitions. As previously mentioned, banks are generally requiring a down payment of cash to underwrite loans. If you’re planning to buy a business, you’d still be smart to keep saving up money in the bank to fund at least a portion of the sale.
6. Business Brokers Are More Important Than Ever. Especially for online business transactions, business brokers are becoming an absolute necessity for both buyers and sellers. With more buyers now using other sources of financing beyond savings, they can use the help of Internet business brokers to determine how best to secure funds. For sellers, an online business broker can vet prospective buyers to ensure that time isn’t wasted on individuals who won’t be able to secure financing to buy an online company.
If you’re considering buying or selling and would like to consult with an
online business broker, give us a call. We can schedule an appointment with one of our online business brokers, so you can get answers to your questions and learn more about the sales process.