Question:
What is my best approach for purchasing a business? I have found a few businesses with great numbers and an existing clientele. The problem I am running into is when asked for my financials to determine my buying power the process then ceases. I have very little credit because I recently finished college. What do you suggest that I do? I appreciate any help you could offer.
Answer:
I am pleased to learn at least that your search has produced some interesting opportunities and I understand your predicament.
Certainly it makes sense from the seller’s side, whether the business is being sold by the owner or through an intermediary, that they want to be sure that a buyer prospect has the financial ability to complete a transaction.
I think this is where you may need to take a step back from the search process and honestly evaluate your expectations and determine what type of business you can realistically acquire.
While it would be great if buying a business was similar to the real estate infomercial world where you can (apparently) buy significant assets with no money down, the same does not hold true in small business acquisitions. Having available funding is, however, more important than your credit rating if you look to seller financing as a means to complete a transaction.
Credit-wise the hang up will be if you approach traditional lenders.
Unfortunately, you may be penalized on two fronts: your credit rating and your lack of experience. These two criteria are crucial to any lender.
As such, my recommendation is for you to first get a true handle on how much money you have available for a down payment and for working capital. Then, you should focus your attention on businesses where the seller is either offering to finance part or where you feel confident that you can negotiate these terms.
If, however, you are in a situation where you simply do not have any assets that can be used for the down payment, you may want to look to the “Angel Investor” community. These are individuals that usually finance start-ups but they do participate in financing existing businesses.
Quite often these individuals have groups/associations in cities that can be located through the chamber of commerce or online. You will be required to meet with them and present a business plan but that can all come as step two. The first thing to do is locate these individuals/groups and arrange to meet with them so that you can educate yourself about what they expect. Generally, they want to see you as a savvy manager and someone who they are prepared to bet on to operate the business successfully. If you can impress them they will surely be open to any proposals/opportunity you may present.