The ability to buy a business often comes down to the amount of equity that a buyer brings to the table.
Approaching a business purchase with sufficient personal resources affords one the luxury of more flexibility and better negotiating power.
This article explore some advantages of bringing equity to the purchase.
Negotiating The Purchase Price Of The Business When you bring your own money to a deal the theory is that you will rely less on the seller providing some level of financing.
All other variables being equal, a seller of a business will be more apt to reduce the selling price if he or she knows that the deal will be for all cash.
In other words, there is a discount for the all cash buyer and a premium put on the price of the company if a VTB is needed.
As an investor, you need to determine which is the right balance.
After all, you might be OK with a slightly higher price if you knew that the vendor would provide some of the money.
In this scenario, the vendor also has a vested interest in your success since the repayment of the loan hinges on the company thriving.
Financial Institutions When you find a business to buy, there is a chance that you may need bank financing.
One of the key ways that bankers look at a loan application is through the debt to equity ratio.
They examine how much of your own funds are going into the deal versus the amount that is being requested.
If the debt/equity ratio is not in line with their policies, you may be forced to go to a higher risk lender and pay more in interest.
You may not get a loan at all if the figures are too far off.
Working Capital For After The Deal Closes Sometimes buyers of small businesses in Canada spread themselves too thin.
They scrape together a down payment, secure a bank loan and negotiate a VTB from the seller.
What is often miscalculated is the amount of working capital that is to be needed for immediately after the closing date.
Most new owners do not have the cash on hand to fund the operations of the company and usually partially rely on terms from their suppliers (if they are provided to a new owner) and personal lines of credit.
If you have some money on hand that can help to finance the operating capital.
Rainy Day Funds A big reason why some businesses fail is that they do not anticipate the unexpected.
It is important to have a rainy day fund for both personal reasons and business interruption purposes.
People do not think about accidents or illnesses that can strike at any time.
Approaching a business purchase with sufficient personal resources affords one the luxury of more flexibility and better negotiating power.
This article explore some advantages of bringing equity to the purchase.
Negotiating The Purchase Price Of The Business When you bring your own money to a deal the theory is that you will rely less on the seller providing some level of financing.
All other variables being equal, a seller of a business will be more apt to reduce the selling price if he or she knows that the deal will be for all cash.
In other words, there is a discount for the all cash buyer and a premium put on the price of the company if a VTB is needed.
As an investor, you need to determine which is the right balance.
After all, you might be OK with a slightly higher price if you knew that the vendor would provide some of the money.
In this scenario, the vendor also has a vested interest in your success since the repayment of the loan hinges on the company thriving.
Financial Institutions When you find a business to buy, there is a chance that you may need bank financing.
One of the key ways that bankers look at a loan application is through the debt to equity ratio.
They examine how much of your own funds are going into the deal versus the amount that is being requested.
If the debt/equity ratio is not in line with their policies, you may be forced to go to a higher risk lender and pay more in interest.
You may not get a loan at all if the figures are too far off.
Working Capital For After The Deal Closes Sometimes buyers of small businesses in Canada spread themselves too thin.
They scrape together a down payment, secure a bank loan and negotiate a VTB from the seller.
What is often miscalculated is the amount of working capital that is to be needed for immediately after the closing date.
Most new owners do not have the cash on hand to fund the operations of the company and usually partially rely on terms from their suppliers (if they are provided to a new owner) and personal lines of credit.
If you have some money on hand that can help to finance the operating capital.
Rainy Day Funds A big reason why some businesses fail is that they do not anticipate the unexpected.
It is important to have a rainy day fund for both personal reasons and business interruption purposes.
People do not think about accidents or illnesses that can strike at any time.