Private Funding Options How to have family & friends participate in acquiring a business
Review of funding options Small Business Administration (SBA) Lending – Buyer gets a loan for up to 100% of sales price from a bank. Cash – Buyer pays all cash upfront Seller Financing – Seller holds a guaranteed note for the purchase price (or a portion thereof) Earnout – Buyer makes payments to seller based on the performance of the business going forward
Cash can come from many places...but primarily from - Buyer’s Personal Monies - Buyer’s Family and Friends
Buyer’s Friends & Family participate in many ways... Gift – The buyer does not owe any of the money back
Loan – The buyer is getting a private loan and must pay it back
Equity Purchase – The participant becomes a buyer themselves and owns a percentage of the company
More about Loans Loans can be structured many ways but are always due to be paid back. Terms to consider: 1. Amortization. The longer the time period, the smaller the monthly payments are. A loan amortized for 10 years will have larger payments than one for 30 years. 2. Balloon payments. Even with the amortization schedule, there can be a “balloon” due, which is the remaining balance. This helps buyers have lower initial payments but let’s the funder be paid sooner than 10-30 years. Often times balloons are a chance to refinance the debt into a more traditional commercial loan. 3. Interest rates. Interest rates are agreed upon and added to the monthly payment. Traditionally interest is amortized, meaning more interest is due in beginning and less as the balance decreases.
More about Equity Equity partners can be passive or active. They can take disbursements when the primary equity holders do or have a different schedule (in other words, how do they get paid). Unlike a loan, equity partners are not by default “owed” back their investment, rather they have bought into the company via cash (versus perhaps sweat equity). Any and all expectations should be talked through and documented in writing prior to any sale.
Key Takeaways Communication is key. Talk about any concerns ahead of doing a deal. Document everything. Even people who love each other can miscommunicate or misunderstand intention. Define roles. Loan givers do not usually have input in dayto-day operations, whereas equity partners may or may not.