Listen To Our Most Recent Podcast Episodes As Soon As They're Live: Here!

Funding the Sale of an Online Business

Posted by Matt Perkins in Articles
Share: is a boutique brokerage that focuses on representing savvy Entrepreneurial Sellers of online businesses.   In order to facilitate the sale of your company, a funding mechanism must first be in place. There are various ways to accomplish this:

  1. Cash Buyer.  This sometimes happens on smaller purchases of under a half million dollars, but for the most part, this is rare (even at that level).
  2. Seller Financing.  The Seller holds a note and the Buyer will fund 35 – 60% of the purchase price. In this case, it is usually a payback period of 3 – 5 years at an interest rate of 3 – 6%.
  3. Bank Financing.The preferred way of Selling a company is with the use of bank financing or an SBA backed loan. Though this method is much maligned by those that don’t fully understand the power of SBA financing, it is a very effective and useful way of maximizing the return on the sale of your Business. We have used this mechanism effective many, many times.      

Let’s talk about SBA loans. The reason this implement is somewhat scorned is that very few intermediaries know how to effectuate them, and surprisingly, neither do many bankers. What we have discovered is that when you work with groups that are aggressively lending and specialize in nothing but SBA loans, the process is very streamlined and smooth. The reason this is the preferred method is that typically a Buyer is putting down 10% and a Seller is holding 15% and the Bank is funding 75%. Regarding the Seller holdback, the Bank will dictate the terms of this note. Currently it is:

  • No payments in years one and two
  • Interest only in year three
  • The balance amortizing over the next five years.

Effectively this means that the Seller is receiving 85% of his purchase price at the closing table. This is a pretty great scenario.  Make no mistake, there are a lot of moving parts in the Bank/SBA process. The Buyer has to be well coached in advance to gain approval. In our system, we help with all the gyrations necessary to attain such approval. This includes the presentation of the application papers, the crafting of the resume, the business plan, the 2 year projections and finally the Buyer interview. The Underwriters job is to rule out weak Buyers and will ask trick questions to try to achieve this. Since we know or presuppose most of the questions, we can gain an edge by grilling the Buyer in a mock interview for several hours in advance of this step. It is very rare that we lose a deal.

The process usually lasts 3 months from the moment we submit the application. All in all, to get up to 85% of your cash at the closing table, this is a pretty phenomenal scenario.  One thing to consider is that currently the Banks are only loaning up to $1,200,000 unsecured. So, if the value of the Company is higher than this, it will slightly change the dynamics of the Seller note. Let’s take a scenario where the price of a company is $2,000,000. The structure will probably be as such:

  • Buyer will inject $200,000
  • Bank funding will be $1,100,000
  • Seller note $700,000 (payable according to the Bank)

In this case, the Seller will receive $1,300,000 or 65% at the closing table and will carry the balance as per the banks current wishes.  As the numbers go up, the scenarios are subject to change. In a case where a company may be in the $3 – $7,000,000 range, it attracts a different Buyer. It may be either an equity group or a Company with synergy. In these cases, the nature of the transaction as a whole will dictate the terms and conditions. For instance, a business in a sector with a high barrier to entry may appeal or the proprietary nature or a product or application that has intellectual property rights can also be attractive. Even in these situations, the Buyer is usually looking for the seller to carry a note. Each deal has its own unique and individual flow to it.

To learn more about and our experiences with SBA Financing, please Contact Us.