Most banks say that they are small business lenders. The missing part of that statement is how banks define small businesses and what banks will lend money for. From the bank 's prospective, a small business is an established business and not a new business. Moreover, banks lend money primarily for tangible assets that double as collateral. Banks rarely lend money to start up a business since there is not a track record of success and when they do, they only lend money for tangible assets. For the most part, banks are very conservative in their lending practices to businesses so they can stay within the rules to maintain their required FDIC insurance. Therefore, when you consider that the average main street business has minimal tangible assets and sells for $350k and the average buyer has less the $100k in cash, where does the other $250k come from if not from the bank? The answer is the seller of course. While the seller would prefer that the buyer secure the full purchase price from other sources, he will often have no other choice but to be the lender to the buyer. Let 's face it– a bank 's only recourse if the borrower defaults on the loan is to sell off the assets of the business, which are often very specialized and not very liquid, for a steep discount. However, the seller could step in and take over the business again since he is familiar with the operations, inventory, equipment, employees, and customers, and perhaps even sell it again.
Most banks work with the SBA to help fund loans and generally involve either real estate or other tangible, yet relatively liquid assets, such as a fleet vehicle. Moreover, only about 20% of all deals are financed at least in part with an SBA loan. This leaves a rather...
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...the business exceeds the projected one million dollar in sales for the next two years, the buyer will pay the seller an additional $125k in each of the next two years, adding up the remaining $250k. However, if the business does between $999 and $900k (less than the target revenue), the buyer would agree to pay only $75k instead of the the $125K. If the business does less than $800k, he will make no payment that year at all. Likewise, in an earn out, if the projected target was say one million and the business did 1.5 million, there would an upside to the seller and he may receive perhaps $200k for those years. In the end, an earn out is a effective way to hedge your bets if you are not sure how the business will perform after the sale or if you think the seller is over selling his business.
Have you ever considered buyer finance then buying someone else 's business?
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