The last couple of years have seen renewed interest in people buying and expanding bar, restaurant, and liquor store operations. However, financing the deal continues to be a major roadblock for many buyers wishing to pursue the American Dream of owning their own business. Sure, the banks have lots of money to lend, but getting approval from underwriting is another story. Here are some examples of roadblocks and the solutions used to get the deal done.
Problem #1: The bank wants 20% down, but the buyer only has 10%.
Solution: Seller carryback. Under this scenario, the seller carries back 10% of the purchase price in the form of a secondary note. Many banks and the Small Business Administration (SBA) will view this as a form of down payment as long as the other requirements are met.
Problem #2: Sellers tax returns don’t show enough cash flow in business for the bank to justify a loan. Let’s face it, the IRS isn’t your best friend in business, so you have minimized your tax bite by deducting everything under the sun and/or not disclosing 100% of your income.
Solution: Short term seller financing with a balloon. Usually, this is a 3-5 year deal with payment similar to a bank loan. This gives the new owner time to show earning potential to lenders to secure long-term financing and pay off the seller.
Problem #3: You own your building and business and would like to sell, but your buyer can’t afford the down payment requirements to buy you out.
Solution: Sell your business and lease the real estate to the buyer with an option to buy the building at a later date. Usually, we will put incentives in the “buyout” option to motivate your buyer to get financing for the building sooner as opposed to later. Example: business and building price is $1,000,000. Buyer has $140,000, but the bank needs $200,000 down. Sell business for $200,000 with $100,000 down, and lease building for $5,500 per month with option to buy in first three years for $800,000. Under this scenario, the seller gets his price and the buyer still gets in the game with an option to acquire the building and build long-term equity.
These are just a few examples of creative deal-making we have used to “get the deal done”.