Q: I made an offer on an existing
business and have been working with a lender to raise
capital—but the loan officer only feels comfortable giving me
60 percent of the capital. I have about 20 percent in cash. How can
I come up with the balance of the money?
A: Bridging this gap is a problem
that's kept many entrepreneurs from turning their dreams into
reality. You are a good risk and are buying a profitable business,
but given that you're an unproven entity, the bank is naturally
going to be conservative with your loan. The existing owner, of
course, wants to make a profit from years of labor and isn't
likely to lower the price. So what to do?
Many business owners approach venture capital groups and angel
investors. Though they're solid options, tapping them requires
countless hours of effort on your part to find them, prepare
presentations and follow up. Fortunately, there may be another
way.
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The perfect scenario is to persuade the current owner to take
back subordinate debt—in other words, take back a second note
behind the lender. The owner wins with the possible tax advantage
of deferring capital gains, and you win with an overnight solution
to your problem. Of course, we don't live in a perfect world,
and the current owner may have already ordered an RV and made
reservations at Gatorland—and just wants his or her money. In
that case, venture capital funds, clubs and fairs, as well as angel
investors, may be the next step. But take the baby step first.
Doug Hood is co-founder of Rainmaker Capital Corp., a capital
acquisition consulting firm in Cartersville, Georgia. Co-founder
Marilea S. Hood contributes to this column. Send questions or
anecdotes via e-mail to doughood@rainmakercapital.com.
Originally published in the October 2000 issue of Entrepreneur Magazine