Several years ago (lets call her) Sue wanted to buy a business thousands of miles from home.  She and husband Ralph found the right business and made an offer contingent, in part, on financing.  The business for sale was negotiated to a price of $425,000.  The structure was $80,000 from Sue and Ralph, $40,000 from angel financiers at 12%, $125,000 from the bank at prime plus two, and the balance from the owner at 5%.  It was a business in a service industry and the only collateral available in the business was the accounts receivable.

The business for sale was not in a field that Sue had ever worked in before.  Many banks required a couple of years of experience in the specific field before lending.  However, Sue and Ralph had a nice net worth and credit scores of 750/800.  With a personal guaranty the bank loaned the money.

In today’s world that bank loan might not happen.

Increasingly the business sellers are having to finance and sellers have different ideas about what they want…just as banks do.

Two different banks working with SBA have two different formulas and ten different banks might also have ten different formulas.  Of two I am familiar with, one requires three years of increasing revenues and net-to-owner returns.  Another considers the purchase of a business just like a start up and they will not loan to start ups.

In addition to inventory, receivables, etc. an owner may require a net worth in excess of three times the amount to be loaned.  Some require money or hard assets that have clearly defined values.  Some will not take land.  Some may require 50% down and others only 30%.  Still others require cash only.

While all of this variation existed before, it is more likely more stringent than before as a whole because the recent economic downturn has most, if not all, more cautious and distrusting the value of anything.

Buyers, understand.

Sellers, find flexibility.