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How To Investigate Any Business Opportunity
The chances of obtaining outside financing improve as the size of the business being acquired in-
creases. Not only does the willingness of the lender to participate in the transaction increase, the num-
ber of potential lenders increases as well. Banks, insurance companies, commercial finance companies
and venture capital companies all may be interested in lending money for an acquisition of some size.
Again, the borrower must be of good character, have a clear source of repayment and have a good busi-
ness plan.
Lenders for larger transactions may or may not require personal collateral from the purchaser; however,
they will require a personal guarantee. Collateral for larger loans generally will consist of a first lien secu-
rity interest in the tangible assets of the business such as accounts receivable, inventory, equipment and
real estate. The lender will set loan conditions and restrictions regarding certain activities of the busi-
ness. In the case of insurance companies and venture capitalists, the lender may insist on an equity po-
sition in the business and a role in major management decisions. Commercial finance companies make
loans on much the same basis as banks. While the interest rate such companies charge is usually
higher than that charged by a bank, they are often willing to take more risk.
It is rare for a privately-held business to be acquired without leveraging the business's assets in some
manner, pledging them as collateral for a loan made either by the owner of the business or an outside
lender. The owner has a strong incentive to provide financing if he feels it is necessary to get the price
he wants for the business and has confidence in the buyer. An outside lender must be convinced that
the loan's risk of failure is minimal and represents a profitable transaction. Institutional lenders are gen-
erally conservative and concentrate rate primarily on repayment. To obtain outside financing it is impor-
tant to be well prepared and have the information that a lender needs to make a decision.
6. Pricing the Business
Determining the value of a business is the part of the buy-sell transaction most fraught with potential for
differences of opinion. buyers and sellers usually do not share the same perspective. Each has a distinct
rationale, and that rationale may be based on logic or emotion.
The buyer may believe that the purchase will create synergy or an economy of scale because of the way
the business will be operated under new ownership. The buyer may also see the business as an espe-
cially good lifestyle fit. These factors are likely to increase the amount of money a buyer is willing to pay
for a business. The seller may have a greater than normal desire to sell due to financial difficulties or the
death or illness of the owner or a member of the owner's family.
For the transaction to come to conclusion, both parties must be satisfied with the price and be able to
understand how it was determined.
Factors That Determine Value
The topic of business evaluation is so complex that any explanation short of an entire book does not do
it justice. The process takes into account many, many variables and requires that a number of assump-
tions be made. Shannon Pratt, a noted business valuation expert, names six of the most important fac-