At this point in the article, you should feel confident about getting into a new business without using any of your own cash. Then there’s the obvious question: “Where am I going to get the money for the rest of the purchase price?” Coming up with a way to cover the $100,000 down payment on a $500,000 deal seems relatively easy once you know all your options and opportunities. However, getting the remaining $400,000 can be a more difficult task to accomplish. To your big surprise, it is not. Like the process of arranging no cash down, the methods of paying for the rest should not be a concern. Let’s begin with this simple thought: if you think of money as a commodity, or product, you’ll have an easier time finding it, asking for it, and getting it from those who can afford to lend it. Many people have these resources to lend to you. All you need to know is how to ask for it the right way.
Question: Whose door should I knock on first?
Answer: You may already have your foot inside that door. That’s because, as I’ve mentioned before, the most likely source could be the seller. In fact, before you consider any other funding source, discuss the prospect with the seller. (Later, a few other avenues of financing will be discussed, in the event that the seller is not cooperative with your pitch techniques.) Borrowing from sellers typically offers some key advantages:
1) Sellers are not fanatical about earning interest. Their objective is actually to sell their business at a price they feel most acceptable. The seller wants to get rid of their business for a reason, whatever that might be. This may be to get rid of a financial burden, and for you, an opportunity to put into practice your management expertise to transform the same business into a towering mountain of profit.
2) Sellers can be far more understanding than banks. Let’s say your new business has a slow couple of months, and cash flow has become more like a cash trickle. So now you’re forced to miss a payment, or even two. Which lender is more likely to penalize you-the bank, or the person with whom you’ve formed a solid relationship and who can empathize with your business problems? I am sure that you and I share the same answer.
3) And no, sellers won’t take away your personal assets. Whereas most banks are obsessed with collateral, sellers rarely demand the same. Yes, they may want you to put security interest on the business, but beyond that, a handshake will often close the deal.
Question: If seller financing can’t be worked out, should I simply go to my bank?
Answer: Actually, the ideal bank may be the one the business is already using. They know the business and if the seller can introduce you to his or her long-time banker, it could facilitate the transition of ownership. However, you can also apply at any commercial bank for a business acquisition loan. As you might imagine, though, there’s much more required of this kind of transaction than filling out an application like you would for a car loan. They want to know a lot more about you and your chances of success before they approve the loan; and of course, that depends on your credit history and management skills. One thing you must remember is not to beg. You should never go into any financial institution, “hat in hand”, to plead for a loan. As intimidating as banks can be, they’re really just money supermarkets with shelves full of a commodity they want you to buy.
They need you as much as you need them. If you have a deal that makes reasonable sense, they’ll go along with it and make plenty of money from you. If you come into the bank with an idea for a start-up company, a good business plan is required as well. Solid projections will also be needed as part of the package. Using the business plan, the bank can analyze the feasibility of the venture and will decide accordingly.
Question: You mentioned “business plan” early in the article”. What kind of information can I submit to the banker that can be relevant to what he’s looking for?
Answer: Here’s what you can find in a business plan that will help you gather the necessary information for the banker.
Elements of a Business Plan: cover sheet, statement of purpose, table of contents, description of the business, marketing, competition, operating procedures, personnel business insurance, financial data, loan applications, capital equipment and supply list, balance sheet, breakeven analysis, pro-forma income projections (profit & loss statements), three-year summary, detail by month, first year, detail by quarters, second and third years, assumptions upon which projections were based, and pro-forma cash flow.
It is also necessary to present supporting documents to the business plan. A banker will need to see them before even considering you for a loan.
Some supporting documents are: your tax returns for last three years, your personal financial statement (all banks have these forms), in the case of a franchised business, a copy of franchise contract and all supporting documents provided by the franchisor, a copy of the proposed lease or purchase agreement for building space, copies of licenses and other legal documents, copies of resumes of all principals, and copies of letters of intent from suppliers.
Question: Is there a difference between a marketing plan and a business plan?
Answer: Marketing plays a vital role in successful business ventures. How well you market you business, along with a few other considerations, will ultimately determine your degree of success or failure. The key element of a successful marketing plan is to know your customers-their likes, dislikes, expectations. By identifying these factors, you can develop a marketing
strategy that will allow you to arouse and fulfill their needs. Identify your customers by their age, sex, income/educational level, and residence. At first, target only those customers who are more likely to purchase your product or service. As your customer base expands, you may need to consider modifying the marketing plan to include other customers. In report # 8, a sample of a marketing plan is included to give a more detailed idea of its components.
The business and marketing plans are both necessary tools to help you obtain a good idea of how you should pursue your future business. However, if you are looking for a loan at the bank, the business plan should be enough. The marketing plan can be useful when presenting it to business brokers, venture capitalist suppliers and of course, the seller. Since many businesses are seller’s finance, he will be curious to see what are your ideas that will enhance the sales of the business. By doing so, his shares of the business will increase in value and will be comfortable when you’ll take over.
Question: Can you describe in more detail some elements found in the marketing plan?
Answer: My pleasure. A marketing plan is necessary to direct your new business in the path of success. Consider it like your bible. It will help you target the market, or as we said previously, carve your niche. The marketing plan will help you answer the following questions: How you can position yourself with your competitors? How is your product perceived by the consumers? How should you establish a price for your product? Who will distribute your product? How will you promote the product to the public?
In your strategic situation summary, you should summarize the key points from your situation analysis (market analysis, segments, industry, and competition) in order to recount the major events and provide information to better understand the strategies outlined in the marketing plan.
The second section of the marketing plan should include the targets and objectives. This section explains how to define the market demographically- geographically in social and economic terms. Each market target should have needs and wants that differ, to some degree, from other targets. These differences may be with respect to types of products purchased and the frequency of purchase. Objectives should include the following program components:
4) Promotion (or sales force)
5) Technical services
As for the third section of the marketing plan, here you will provide the position statements that will help you describe how you want each market target to perceive each product relative to competition. State the core concept used to position your product (brand) in the eyes and mind of the targeted buyer. The position statements should describe:
1) What criteria or benefits the customer considers when buying your product along with the level of importance.
2) What you offer that differentiates your product from competition.
3) The limitations of competitive products.
All these details gave you a general idea on the content of a marketing plan. The most important segments are as follow:
• You’ll need to identify how each of your products fits the market target. Other issues that may be addressed would be new product suggestions and adjustments in the mix of existing products.
• The overall pricing strategy should be identified along with the cost/benefit analysis. Identify what role you want price to play, increase share, maintenance etc…
• Describe specific distribution strategies for each market target. Issues to be addressed are intensity of distribution, how distribution will be accomplished, and the assistance provided to distributors.
• Promotion strategy is used to initiate and maintain a flow of communication between the company and the market target. To assist in developing the communication program, the attributes or benefits of your product should be identified for each market target.
• Describe the market research problem and the kind of information needed. Include a statement that addresses why this information is needed.