Has anyone bought a family business before? And if so, did you go through the SBA loan process? The reason I’m asking is my parents are close to retirement and I am interested in purchasing their business from them.
We are meeting with a lawyer later this summer to begin preliminary planning. I know there are various ways to transfer businesses from one generation to another. But I am hoping one potential option may be for me to buy the business from them outright.
The estimated valuation of the business is between $3.5 – 4.5 M. It is a very stable business (~30 years); good cash flow; the balance sheet looks great. The business could easily support the principal and interest payments of a several million dollar loan (assuming interest rates do not skyrocket the next 12-18 months).
I have not discussed buying the business from them yet (I would like to have my ducks in a row first). What I like about the “buy” option is it releases my parents from any liability and will provide them with a nice nest egg for their retirement years. For me, buying may be the best option as I would be the sole proprietor and avoid any family ownership squabbles down the road (I am the only sibling who works for and has ever been involved in the business). I know their preference would be to sell it all other things being equal, but having me as an employee for the business does put some complication in the process.
So my questions are:
- How hard is it to get an SBA loan?
- Does the SBA grant loans of several million dollars?
- How much collateral would I need? (I have about $125K in personal cash, assets and equity not including retirement savings)
- How important is my personal credit? My scores are in the 700’s, but I have one old lingering baddie still on the CR from 2008…
Thx!
Bump :-). Anyone?
@xangoboy wrote:
SBA loans are typically difficult to get. Even if you qualify there is a lot of red tae involved and it could take months. Personally, I have never used them, but I have friends that have. Some have waited several months or close to a year for their loans.
Since it's a family run business and the value is there, you could finance it through varying means. You could finance receivables, equipment, and you could ask your family to give you a 10-20 year note on the balance. There are lenders out there who do business acquisition type of funding, you just need to search for them. If the cash flow of the business supports the valuation and debt service you should have no issue. Most lenders, to support a business acquisition, will want a down payment of 10%-20% of the purchase price.
I noticed you said you have about $125k, this wouldn't be enough (could be if you found the correct lender, but you would still need working capital, unless you are purchasing the businesses cash-which could be used as working capital), but again you could raise some of the down payment through refinancing equipment, taking an advance against receivables, selling excess inventory, and having your family take a note on the balance etc. It's a complicated process, buy if you are willing, it can be done. I do think you have a great advantage, seeing as your family owns it, so they would be more willing to work with you when purchasing the business.
Hope this helps, or gives you an idea on how to proceed.
Sorry for typos if any, using my mobile phone.
Thx much for the great advice and tips.
So basically I would be leveraging the business (almost like refinancing a home mortgage) in order to buy out my parents. The bank I'm assuming would want to see the business has enough cash flow to cover all short term liabilities, labor and expenses + of course their own P & I (with some buffer in case of downturn in business).
We will definitely need to seek outside counsel as it all sounds pretty complicated to execute.