Six weeks ago you lost your job. So far, all your leads have been dead ends and you’re starting to get nervous. You did get a package, but it’s not going to last forever.
Maybe it’s time to go into business for yourself, provide your own job security and income. The thought of it gets your pulse racing. You’ve got a strong work ethic, a positive outlook, experience in leading a team, and hey, if the stress and pressure of your last job didn’t get to you, nothing will. You start researching and the more you read about it, the more it appeals to you. You find out there’s a much higher rate of success based on buying an established business compared to starting one:
- starting a brand new business, 35% are successful
- buying a new franchise, 80 to 85% are successful
- buying an existing business that has shown profit for three years, greater than 98% are successful
Maybe you’ve been thinking along the same lines, but unlike the individual in the above scenario, you don’t have a severance package—you’re still working and you’ve only got $20,000 put aside. You have a line of credit with your bank that you could draw on, though. Should you even consider it?
How much would you need to put down? How much would you need in total?
First, some perspective on buying a small business* in North America:
- 90% of buyers will have to finance the purchase price of a business;
- 90% of buyers will have to get the sellers to finance part of the purchase price;
- 90% of buyers have from $50,000 - $150,000 that they are willing to risk or spend investing in a business.
*all uses of “businesses” here refer to companies with fewer than 10 employees, and less than $3 million in sales.
Negotiating the down payment
In negotiating a business deal there are many things that are important, but none more so than the price and terms. Businesses tend to sell for two to three times what the business makes. Another part of the price and terms is the all-important down payment. The down payment should never take a buyer right out of cash. They will need some working capital to keep the business going, even though an existing business should have an immediate cash flow. Buyers should always keep something aside for the unexpected. And if they’re intending to add improvements, that too, should factored in.
Although the seller always wants more down payment and the buyer always would like a smaller down payment, somewhere in between is a fair deal that will work for both parties.
Keep in mind, too, that negotiating the right deal takes time and effort, typically some three to nine months, and in the meantime you’ll still need to pay for your groceries and other family expenses.