Advice for Buying a Restaurant and Selling a Restaurant

Financing a Restaurant Purchase?  Here's a Review of the 5 C's of Borrowing.

Posted by Robin Gagnon on Dec 22, 2016 9:05:26 AM

Are you planning to finance a restaurant purchase?  If so, the restaurant broker's recap of the "Five C's" may be a helpful prelude to SBA lending. Being aware of these five factors can help you determine if you are ready for lending before buying a restaurant. . What are the Five C's? These are the items lenders use as a determination of risk.   For bank lending, it’s all a matter of risk versus return.  Here are the five C’s and the restaurant broker’s  brief review of these important item.  Be prepared before you ask for that loan.

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The first C is Capital! 

How much money will you bring to the table to finance the deal?  Unlike houses, the restaurant brokers have never seen anything like a "no money down"  or 3% down scenario for buying a restaurant.  Prepare to have at least 20% of the purchase price in the bank before you ask for a loan.  Otherwise, you will risk an almost automatic turndown.  What about more?  Always better!  Why?  This takes the pressure off the business to meet the SBA lending cash flow requirements and gives you some "breathing room" once you take over the business.  

Credit:

What is your personal credit score?  No discussion of the "C's" would be complete without a full discussion of credit.  After all, your past performance in paying your bills is a predictor of your future performance.  As we discuss in our book, Appetite for Acquisition, you should never go shopping to buy a restaurant and start due diligence until you've done some due diligence on yourself.   Before you buy a restaurant, please pull your credit score.  Make sure no one has lifted your identity or that unknown to you, a spouse has racked up a lot of debt that affects the number.  A minimum score of 650 by both a spouse and applicant are required on an SBA loan but that's on the low side.  Banks will look hard at that credit score.  If it's a little on the "soft side”, that can be overcome with careful documentation and notes to the bank. 

Capacity:

Capacity refers to the repayment ability of the business or the cash flow.  The SBA lending requirement is that a business will have sufficient cash flow to BOTH cover the principle and interest (and buyer's financial needs) along with a cushion of 25%. Any restaurant broker worth their salt would have already made sure the "capacity" part of the equation is satisfied before listing the business.

Character:

The next "C" in lending is a character.  This refers to your business experience.  If you are buying a franchise restaurant, having experience isn't always required as the process, systems and way to operate are part of what you are acquiring.  If you come from the airline industry however and are looking to start running a full service white tablecloth business with no background, this one could get dicey.  There are ways to overcome an "experience" or character issue.  Bringing on a family member or partner with experience will fulfill this requirement as would putting a pause on your plans while you gain the relevant experience in the industry would help.

Collateral:

dollar-1362244_1280.jpgThe last of the five "C's" in lending are collateral.  What are the assets you have to guarantee the loan?  Aside from the assets of the business which will always be pledged, the bank will request that you collateralize the loan as well.  This is often with a second mortgage on your home or other property you may own.  For some restaurant buyers, this is a sticking point, so making sure you and your family are on board with what you are willing to risk is important before going forward with SBA lending.

That’s it.  Spend some time making sure you are prepared to address these five C’s with lenders and your loan will see easy approval.  Concerned about one of these items?  Contact the restaurant brokers personally to discuss your situation and see how we can help you with our SBA lending resources.  Remember, these are guidelines, not absolutes and every deal is different.  Ready to prequalify and talk to our resources?  We can help with that as well.  

 

 

Topics: Financing a Restaurant

Restaurant Brokers Tackle Financing Option in Radio Show Debut

Posted by Robin Gagnon on Aug 7, 2013 2:53:00 PM



The restaurant brokers, Eric and Robin Gagnon were joined on the air recently by industry experts to discuss the topic of financing a restaurant.  Guests featured some of the restaurant industry's best and brightest including:  

David Nillson, Co-Founder and CEO of Guidant Financial

David co-founded Guidant Financial in 2003 and has been a featured speaker at over 350 national and international events, covering topics from entrepreneurship to small business financing. In addition, he and his company have been highlighted in such media sources such as CNBC, Fortune Magazine, Entrepreneur, CNN and The Wall Street Journal. In 2007, the Small Business Administration (SBA) named Nilssen the National Young Entrepreneur of the Year and the Puget Sound Business Journal named him one of the top 40 businesspeople under 40 years of age. In both 2008 & 2009, Ernst and Young named him a finalist for their coveted Entrepreneur of the Year award. In 2011, David released a book called Making the Jump into Small Business Ownership and was named one of the Top 100 Small Business Influencers. He is also a past president of the Seattle Entrepreneurs’ Organization.

Sylvia Shiverdecker   Vice President, BB&T

Sylvia has been a business banking lender for over fifteen years.  She started her career in Birmingham, Al with SouthTrust Bank as a small business lender.  Southtrust Bank was purchased by Wachovia bank and then by Wells Fargo.  She left Wells Fargo in June of 2010 and joined BB&T Bank as a Business Services Officer.  A Business Services Officer at BB&T Bank works with business owners to help them obtain the capital they need to operate and grow.  She works with restaurant buyers to offer cash management and deposit services to help business owners manage the day to day cash flow of a business. 

Alex Sheshunoff    Founder, Foodstart.com

Alex Sheshunoff is the founder of Foodstart.com, a crowd funding platform just for independent restaurants, food tucks, cafes, and other businesses in the food and beverage industry. 

The entire show featured this illustrious panel taking on topics such as:

  • What's the best path to financing?
  • Can you combine sources to leverage your capital?
  • What's the time frame to obtain financing based on the source of funding you use? 

Watch the restaurant brokers in our video series for the answers to these and other questions on buying a restaurant with the use of financing options in today's marketplace.

The restaurant brokers are live on the air every Saturday at noon on Atlanta's WGKA AM920.  You can also listen after the fact to a podcast of the entire restaurant radio show.  The podcast is available online through subscription through the iTunes store and on their powerhouse website, wesellrestaurants.com.

 

Topics: Financing a Restaurant

Crowd Funding – Financing a Restaurant With the Help of a Crowd

Posted by Robin Gagnon on Jul 29, 2013 12:21:00 PM

financing a restaurant

This is the final segment of our five-part series by the restaurant brokers on financing a restaurant.  The final option we are exploring in this series is called Crowd Funding.  It’s a means of financing a restaurant with the help of your biggest fans – friends and family.

Crowd sourcing or crowd funding is the newest kid on the block when it comes to financing a restaurant purchase.  It’s the idea that your friends, family and customers all support your business in an online community-funding platform. 

Depending on the how the middle man (the crowd funding website designs the program), friends, family, customers - anyone - can back your business in small increments (i.e. $50 or $1,000) until you get the dollars you need for your concept.  You create a “campaign” with a goal of $50,000 or $25,000 or whatever you need.

The great thing about the food industry is that unlike investing in real estate (can you say BORING!?), backers get great perks and rewards for their investments.  The restaurant seeking funding offers discounts, free desserts, menu items that might be named after investors, Chef’s table seating or even behind-the-scenes tours.  The “pay off” if whatever the restaurant owner decides and hopefully, long term, the backer gets their capital back as well.

Social media has given a lot of steam to this new concept so it feels like a brand new idea however the restaurant brokers interviewed the founder of one major site, (www.foodstart.com) last week and he reminded us the concept has been around for decades.  In fact, according to him, a professional football team back in the early 1900’s ran a grass roots campaign similar to today’s crowd funding and fans pitched in to save the team for the city.

How do you find the crowd and fund your project.  No worries, the internet solves that with a number of website. 

Businesses first need to make sure they have an idea and for most, this may be an extension of their existing location – adding a food truck or second location.  Once that’s in place, they need to develop a “pitch.”  A pitch is what you say about why you need the money and how great it’s going to be to invest.  Then you need to pick what you’re going to give in return for the money.  This is where you “pick the perks” like a free dessert or call ahead seating or whatever you want to give to people backing your idea. 

Lastly, you build a buzz around the idea by reaching out to your customers.  This is where it’s very important that you have a database of customers who also have lots of people in their social network so the idea goes viral and lots of people kick in.

The benefit to this type of funding for restaurant owners with existing concepts is that you already have a customer database to market to.  If you’ve been in business for any period of time, your database of potential investors is eating dinner every night. The other benefits drive from the social media aspect and community engagement elements of the campaign.  People like to promote and help their local businesses. This is not a concept for franchises - it’s definitely all about the independent restaurant owner

Finally, you collect the money and roll with your idea.

The country made a huge step forward on the prospect of crowd funding nationwide last April when a bill was signed into law that gave the Securities and Exchange Commission the authority to draft the rules around this idea.  Unfortunately (it’s government – are we surprised?), they haven’t acted quickly.  That hasn’t stopped several sites from popping up and beginning the funding process.  Here are a few of the websites that the restaurant brokers are aware of that are either on the way or already funding campaigns.

Foodstart.com and Kickstarter.com examples of two websites up and running and offering programs today.  If you think your restaurant idea can catch on in a crowd, check them out and let the restaurant brokers know how it turns out.

This is our last article in this series on Financing a Restaurant – What are My Options.  To check our the previous installments, check the links below.   Our 5-part series on financing a restaurant includes:

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Topics: Financing a Restaurant

Tax Free Stock Conversions for Financing a Restaurant

Posted by Robin Gagnon on Jul 15, 2013 2:11:00 PM

financing a restaurantWondering how to buy a restaurant if your credit is shot or the owner isn’t willing to finance the purchase? This is the fourth in our 5-part series by the restaurant brokers on options for financing a restaurant and this one focuses on one more option – the Bank of You! The great news is that you won’t be turned down by some snotty lender since the control is all yours.

The Bank of You is also known as your own 401K savings. Restaurant buyers often overlook these funds as a source of capital for financing a restaurant purchase without realizing there are multiple ways to use 401K funds without facing a large tax bill from your Uncle Sam.

The easiest approach is to borrow against your 401K. In this option, you are able to simply use your own money as the security or collateral for a loan. The advantages of this option are:

Quick and Easy Credit Scores can be marginal as long as appropriate security is in place.

No Tax Consequences Since you are only borrowing against the securities in your 401K account, there is no “cash out” that would trigger a tax event with the Internal Revenue Service.

Disadvantages –

Costs – No matter how you cut it; this option is still a loan and will cost you setup fees along with interest costs over the term of the loan.

Risk to Source Funds – Your 401K securities are the collateral and if you default on the loan, they would be subject to takeover by the lender and that would or could trigger a tax event in addition to the loss of capital.

The second and most frequent approach the restaurant brokers see used by restaurant buyers is the 401K conversion method. In this option, your 401K is actually converted to capital for the investment using the Internal Revenue Service guidelines and is tax free. In this case, your new 401K is made up of your restaurant purchase. The benefits to this include:

Simple to execute. As long as you use a knowledgeable group like Guidant Financial, the effort on your part is minimal. A top class firm like Guidant will process all of the paperwork, do the legal and accounting effort to keep you in compliance with the IRS and transfer the money in time for you to buy a restaurant.

Short Time Frame. A 401K conversion can be completed in as few as 30 days, a standard amount of time in a closing of a restaurant for sale.

Disadvantages –

Risk to Capital – Like the loan against your 401K, it is possible for you to lose your investment if you take over a restaurant and it ultimately fails. That means you should be confident in your ability and the books and records of the restaurant you are buying. The great thing about using your 401K funds is that you are never taking a taxable distribution. Instead you are you are buying stock, as an investment, in your new company. Better yet, there’s no loan since you’re using your own money, interest-free.

Entrepreneurs like this approach since they avoid debt and interest payments. In addition, since you’re investing in yourself, you have total control over the success of the investment. If you don’t have enough funds in your 401K for buying a restaurant this option can satisfy the down payment requirement on an SBA loan thus using it to supplement traditional financing.

Converting retirement funds is not a new concept. For years private companies have used retirement funds as a source of business capital. Since the passage of the Employee Retirement Income Security Act of 1974 (otherwise known as ERISA), entrepreneurs can take advantage of the same opportunity. So, if you are sitting around trying to figure out your sources for financing a restaurant, don’t overlook that nest egg called a 401K you have been adding to all these years. It’s a definite method to explore when financing a restaurant.

Our last article in this series on Financing a Restaurant – What are My Options is titled, “Crowd Funding - Financing a restaurant with the Help of a Crowd.” The restaurant brokers will publish the next installment in the series next week. Our 5-part series on financing a restaurant includes:

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Topics: Financing a Restaurant

Owner Financing When Buying a Restaurant (3rd in Series)

Posted by Robin Gagnon on Jul 2, 2013 6:24:00 AM

financing a restaurantLooking for help financing a restaurant?  This is the third in our 5-part series titled "Financing a Restaurant, What are My Options?"  This article focuses on owner financing, another method for financing a restaurant purchase.

Owner financing has some definite advantages over other types of lending when buying or selling a restaurant.  They include:

1) Low Upfront Costs.  Unlike conventional financing, owner financing is typiclaly free of many or all the fees associated with bank loans, equipment loans or even unsecured financing options.  It's not unusual on a traditional bank closing to see the same type of costs you would see on a house loan including:  origination fees (ranging from 1/2 percent to 1% of the loan amount), application fees ($100 to $500), credit check fees ($75-$150) and documents fees ($75-$150).  These costs, tacked on by conventional lenders are part of their income stream and can add thousands or even tens of thousands of dollars to the amount of the loan.  When you finance a restaurant purchase directly with the owner, these costs are all avoided. 

2) Favorable Interest Rates.  Owners typically (though not always), offer more competitive interest rates on owner financing a restaurant than traditional lenders.   SBA secured loans are often Prime plus a percentage in terms of their interest rate.  Owners can afford to spread their risk over a lower rate and as the restaurant brokers see interest rates rising, this can result in significant savings over time. 

3)  No penalties for early payoff.  Unless the seller is quite sophisticated, it is very rare to see a penalty for paying the loan off early when financing a restaurant purchase with the seller.  Most restaurant owners simply want their money and are happy when you pay it off.  This is not the case with conventional lenders who routinely charge a prepayment penalty as their earnings are based on the full amortization of the loan.

4) Skin in the Game.  This is the restaurant brokers favorite benefit for buyers when using owner financing for buying a restaurant.  A seller who offers financing has a vested interest (his payment!) in your long term success.  For that reason, we see a strong level of engagement, training and transition in the purchase.  Since his future money flow is dependent on the proper training of you as a replacement, the job is done right. 

While the loan with a seller may be somewhat simpler and less costly when financing a restaurant with the seller, don't mistake that for a less stringent agreement.  Owner financing is not done on a handshake but takes the form of a legal document. 

An attorney will draft the note between the parties and you may expect it will include all of the following:

1) Lien on the Assets.  The furniture, fixtures and equipment in the restaurant will be "liened" by the seller.  That means it cannot be resold without his note being paid off in full.  That protection for the seller keeps you from buying his restaurant and then emptying out the equipment without paying him.

2) Personal guarantee.  While you may purchase a business through a corporation, sellers fully expect you as an individual to guarantee the payment on the loan.  That's their protection to collect if you take over the restaurant and then fail.

3) Specific remedies and a "right to cure" if you fail to make the payments.  The seller financing documents will spell out what happens if you fail to make a payment and the restaurant owner's rights to recover his property.  This will have the full force of the law.

While financing a restaurant with the seller can be simpler and less costly than working with a traditional lender, it is still very serious business.  

Our next article in this series on Financing a Restaurant – What are My Options is titled, “Tax Free Stock Conversions for Financing a Restaurant.”  The restaurant brokers will publish the next installment in the series next week.

Our 5-part series on financing a restaurant includes:

LIKE this article?  Please SHARE it on Facebook, Linked In or Twitter. 

Topics: Financing a Restaurant

SBA Lending – Financing a Restaurant with Uncle Sam’s Help (2nd in Series)

Posted by Robin Gagnon on Jun 21, 2013 2:13:00 PM

Financing a RestaurantLooking for help financing a restaurant?  This is the second in our 5-part series titled "Financing a Restaurant, What are My Options?"

One key resource for restaurant financing is an SBA lender, so called because the loans have the backing of the Small Business Administration or SBA.  While the SBA does not ISSUE loans (a common misconception) they do GUARANTEE loans.  That makes banks more willing to accept risk since the government is standing behind the deal. 

With terms as long as 25 years, low monthly payments and fixed rate options, SBA backed loans are the type of loans that work in large restaurant acquisitions.  The only caveat – the restaurant for sale must have a track history of results and multiple years of tax returns to qualify.  Anything advertised by the restaurant brokers as “Pre-Qualified for SBA lending” or stating “Excellent Books and Records” is a candidate for financing a restaurant with a bank.

Here are a few of the benefits of an SBA loan:

  • Payments are fixed and fully amortized meaning there are no balloon arrangements.  That’s a benefit over owner financing where it is more typical to see balloon payments (a large single payment at the end of a series of smaller monthly payments).  The restaurant brokers also typically see lower monthly payments that are easily reached through the cash flow of the business since this is part of the lender’s analysis before granting the loan.
  • Down payments range from 10 – 30% according to many lenders.  It is rare however, that the restaurant brokers see any down payment lower than 20% and that’s an improvement we’ve observered in the past year or so.  In '08,'09 and '10 on the heels of the recession, it was typical to see banks request as much as 35% down. 
  • Terms can be as long as 25 years though it’s much more typical to see them at 10 years.  In general, the term of the loan must match to the length of the franchise and the length of the lease.  You can’t have a loan on a business for 10 years with a lease that’s for 8 years or a franchise for five years.  The good news on a ten year term is that there are no prepayment penalties on loans under 15 years which means you can pay off early with no additional costs.
  • Fixed rate options are the standard on an SBA backed loan.  That gives you security as a buyer of what your payments will be over the term of the loan unlike a variable rate.

 With the good comes the bad and the downside to an SBA lender program can be:

  • High upfront costs in the form of origination and other bank fees.  This is one area restaurant buyers should carefully check.  Be sure to compare fees since they will vary dramatically from lender to lender.
  • Another drawback on an SBA loan can be the sheer amount of paperwork.  If you aren’t good at keeping up with your tax records, financial statements and filling out forms, this might not be the right course for financing a restaurant.  
  • Lastly, the government is very inflexible on certain key points.  If the loan exceeds $350,000, they will not budge on a requirement that your personal residence service as additional collateral on the loan. That can be off-putting if you’re financing a restaurant purchase and want to leave your personal residence off the table.  They also require that your spouse be part of the personal guarantee on the loan.

If you’re doing a franchise start up, SBA lenders are also ready to lend, particularly if the franchise has been listed on the Franchise Registry.  This is the program for lenders where franchises submit their financials up front for their open and operating stores making the construction loan a simple process.

The Small Business Administration is a great resource for financing a restaurant as long as you are aware of the work and costs associated with this path.  You can find multiple lenders that process these loans online at sba.gov or ask a professional restaurant broker for advice on lenders he or she has worked with in the past. 

Our next article in this series on Financing a Restaurant – What are My Options is titled, “Owner Financing When Buying a Restaurant – the Good, Bad & Ugly.”  The restaurant brokers will publish the next installment in the series next week.

LIKE this article?  Please SHARE it on Facebook, Linked In or Twitter.

Our 5-part series on financing a restaurant includes:

 

Topics: Financing a Restaurant

Financing a Restaurant - What are My Options? (5-part Series)

Posted by Robin Gagnon on Jun 15, 2013 5:12:00 AM

Financing a RestaurantWondering how to go about financing a restaurant?  You're not alone.  We get calls each week for answers on funding and the restaurant brokers have lots of ideas.  Here are just a few of the many options for financing a restaurant.  We will cover these on a general basis in this blog posting and continue with a 5-part series by breaking down each form of financing into an in-depth look complete with links to resources and lenders.  For today, here are the highlights for financing a restaurant.

SBA or Small Business Administration Lenders

The Small Business Administration does not actually fund any loans but they guarantee up to 80% of the loan giving local banks more security against their risk. 

SBA lending isn't confined to just franchise opportunities.  There are multiple programs available including the SBA 7(a) which lends up to $5 Million.  Lenders also process MicroLoans on behalf of the SBA that fund up to $50,000.  Strong lenders can go through the pre-qualification process with you on any structure and have answers in less than 30 minutes.

If you're doing a new franchise start up and the franchise is on the Franchise Registry list, then the SBA has already reviewed the fundamentals of the business and will just need your personal information to move forward on the loan.

Smart restaurant brokers have strong relationships and submit listings to their SBA lenders so they are pre-approved and buyers can flow right into the financing process once they find the right listing. 

Next week, we’ll cover SBA lending in depth with our 2nd article in this series titled, “SBA Lending – Financing a Restaurant with Uncle Sam’s Help.”

Equipment Leasing

Start-up businesses can often qualify for equipment leases with a multitude of programs with credit lines up to $2 Million.  This lowers your capital costs up front and some of the benefits include:

  • No personal collateral
  • Potential tax advantages
  • Preservation of credit lines
  • Fixed payments and rates

Owner Financing 

If you're buying an independent restaurant, don't discount owner financing as an option.  Many owners will carry a portion of the note ranging from 25% to 50% of the purchase price over a period of years to allow you to pay them over time.  The advantage of owner financing is that you avoid fees and often get a quite competitive interest rate as well.  We will do a second installment in our series on the structure and types of owner financing options to consider when financing a restaurant.  Look for this article in two weeks under the title, ”Owner Financing When Buying a Restaurant – the Good, Bad & Ugly.”

401K Conversions or Stock Portfolio Loans

401K conversions have become quite popular in recent years as baby boomer executives leave the corporate world to a slow job market.  The roll-over of a 401k to fund your business can be done without any tax consequences.  The restaurants brokers work with an excellent firm on this process and we’ll do an entire article in our series on this option.

In addition to 401K conversions, some buyers with strong portfolios they don’t want to cash out can simply borrow against them.  This is a strong option for experienced investors with a strong grasp of their stock portfolios’ future.   The restaurant brokers will tackle both these topics in the third part of our series in the article titled, “Tax Free Stock Conversions for Financing a Restaurant.”

Crowd Funding

If you haven’t heard of crowd funding yet, get ready.  Lots of states are not waiting on the federal government and the Securities and Exchange Commission to finalize their plans before acting NOW to offer this resource.  The restaurant brokers will cover the exciting idea of crowd funding that we expect to explode in the marketplace over the coming years.  Look for our upcoming article in this series titled, “Crowd Funding – Financing a Restaurant With the Help of a Crowd.”

If you’re in the market to buy a business and thought financing a restaurant wasn’t possible, we have lots of options.  Continue to check our blog or subscribe for our 5-part series on financing a restaurant that will include:

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Topics: Financing a Restaurant

Financing a Restaurant Purchase in the Current Economy

Posted by Robin Gagnon on Sep 12, 2012 3:34:00 PM

financing a restaurant purchaseFinancing a restaurant purchase may be more difficult, but it’s still possible though a recent survey of BizBuySell demonstrates brokers don't all agree on this point.

Financing a restaurant purchase has improved according to our restaurant brokers but that finding is at odds with a recently released survey by BizBuySell.  They surveyed the nation’s business brokers and found that nearly 70% say financing a restaurant or business is still not improving for business buyers.  Quoting directly from their article, the survey found that, “Of the 260 business brokers surveyed across the nation, 68.8 percent said that financing availability has not improved since 2011. That percentage is virtually unchanged from August 2011, when 67.8 percent of surveyed brokers said financing had not improved from 2010.”

That’s not all the survey revealed.  Most of the brokers surveyed were not optimistic about the rest of 2012 as they cited 72.9 percent of brokers expect no change in funding availability through the rest of the year. Almost 1/5 (19 percent) indicated that financing availability will tighten even further.

What’s a restaurant buyer to do with such grim reports?  As these restaurant brokers have been sharing over the course of the year, we actually see lending improving and opportunities for financing a restaurant purchase getting better.  After a nearly four year hiatus, we’ve financed several deals with SBA lenders so far in 2012.  The key to getting lender agreement on financing a restaurant is a broker that understands how to pull all the financial material together, package the deal and put it in front of a lender who understands the industry. 

In addition to SBA lenders for financing a restaurant purchase, we’re also seeing alternative forms of capital extended that are filling the void created by traditional lenders.  These options include:

Seller Financing:

Our restaurant brokers are seeing around a third of all deals closed with some form of owner participation in financing a restaurant. That’s on par with the BizBuySell survey that found “one-third of brokers surveyed indicated that nearly all small business sales included seller financing while a further 35.5 percent of brokers indicated that most (i.e., 60 to 89 percent) of the deals they see include seller financing.”

Crowd Funding

Financing a restaurant purchase using crowdfunding is an idea that’s still developing.  The restaurant brokers predict that within the next three years it will common to reach out using the Internet and social media to ask people in a crowd for help in financing a restaurant purchase.

Micro Loans

Micro loans are those under about $50,000, sometimes all you need for financing a restaurant purchase.  We like Accion who offers business loans ranging from $500 to $50,000.  They specialize in working with small business owners who cannot borrow from traditional banks due to a business type, short length of time in business or insufficient credit history.

401K Conversions

Convert your 401(k) into money for financing a restaurant purchase.  A great company focused on this process is Guidant Financial (online at www.guidantfinancial.com ).  They allow you to invest your existing IRA or 401(k) funds into your own business.  You don’t take a taxable distribution and you buy stock in your own company.

Online Lenders

www.Boefly.com is the e-harmony of lenders and borrowers.  They function as matchmakers between restaurant buyers that want a loan and lenders that are looking to fund deals.   Restaurant buyers go online, pay a small fee (as low as $99) and fill out a standardized application.   The firm then confidentially “shops” the loan to up to 1500 lenders at the same time.  That means you are not limited to local lenders and instead have availability to someone that may be 500 miles away but specializes in financing a restaurant purchase.  Your information is secure and they present some compelling case studies on their deals. This site will require that you have good financials on the business you’re interested in buying and is better suited for larger deals (over $100,000).

www.prosper.com does the same thing for smaller deals between consumers and borrowers.  Borrowers choose a loan amount, purpose and post a loan listing.   Investors review loan listings and invest in listings that meet their criteria.  Once the process is complete, borrowers make fixed monthly payments and investors receive a portion of those payments directly to their Prosper account.  This is for small loans up to $25,000 and they are unsecured.

From these options you can see that financing a restaurant in today’s economy may be a bit more work than in the past but there are multiple ways to tap into capital for buying.

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Topics: Financing a Restaurant

Financing a Restaurant Purchase

Posted by Robin Gagnon on Jun 29, 2012 10:48:00 AM

Financing a restaurantFinancing a restaurant purchase is getting easier by the day - IF you know where to look. The days of saying “no” to all kinds of lending to buy a restaurant seems to be past us as restaurant brokers see new programs hitting the market.   In particular, there is a great deal of opportunity surfacing for smaller loans known as “micro loans.”  These are great opportunities for financing a restaurant if you’re looking for $50,000 or less. 

One micro loan company offering choices for financing a restaurant purchase is Accion.  Accion offers business loans ranging from $500 to $50,000.  They specialize in working with small business owners who cannot borrow from traditional banks due to a business type, short length of time in business or insufficient credit history.

What are the loan requirements?  Here’s a look at their requirements:

  • Credit score of 525 or more
  • No bankruptcy in the past 12 months or foreclosure in the past 24 months
  • No late rent or mortgage payments in the past 12 months
  • Up-to-date on all bills
  • No more than $3,000 in past due debt, generally acquired under emergency circumstances (such as layoff or illness)
  • Steady cash flow and the ability to support monthly loan payment
  • Any mortgage must be fixed-rate or be an adjustable rate mortgage that does not adjust during the term of the loan.
  • Additional security may be required depending on strength of application.

For most buyers seeking financing for a restaurant purchase, this is much simpler than SBA lender requirements and more cost effective for smaller loans.   

You can also get funds from this micro lender for the purchase of an existing business or change of location as long as the restaurant has been in operation for six months or more.  They need six months of revenue records on the business.  You’ll also need to provide a qualified cosigner, a market study and 12 months of projected financials (or a business plan) and if the business is not yet profitable, a borrower must have external income that is fully able to support the loan.  

This is just one of the new sources of funding for financing a restaurant we’ve uncovered.  We’ll review another in our next blog posting.

Topics: Financing a Restaurant

The Best Kind of Financing for Buying a Restaurant

Posted by Robin Gagnon on Jun 8, 2012 10:59:00 AM

What’s the best kind of financing for buying a restaurant?  Any kind you can get in today’s lending market.  That being said, there are both pros and cons to each method of financing for buying a restaurant.  Here they are. 

Owner Financing: 

Owner financing is the tried and true method for buying a restaurant and has lots of benefits for the new operator.  First and foremost, the seller believes enough in his pricing and the earnings that he’s willing to put his money at risk.  That’s powerful for a buyer.  Secondly, a seller with “skin in the game” is sure to be more responsive if issues surface after the closing since he or she is dependent on your success for his earnings.  Lastly, interest rates and up-front fees associated with financing a restaurant purchase are usually much lower when the owner is the bank.  There are no loan “origination fees” or “points” like a conventional bank loan and interest rates are also generally below market rate.

The cons of owner financing are that it is usually for a short period of time (typically under three years) so the cash flow will be reduced while you pay off the initial debt.  You will also probably be on the hook for a personal guarantee as well as securing the loan with the assets of the business but this is comparable to bank lending as well.financing a restaurant

SBA Bank Lending:

SBA secured bank lending is definitely on the rise and can be a good source of funding for buying a restaurant especially for higher priced offerings.  The upside to this option is that banks will amortize a payment over ten years giving most buyers a comfortable repayment schedule that maximizes cash flow.  In addition, the bank and the SBA will scrutinize the books, records and tax returns of the business so once they sign off, you can feel much more secure that what you’re buying is providing a solid return.

The down side to bank lending with SBA involvement is the long lead time involved in obtaining the financing and high costs to obtain (both in origination fees and interest rate).  The lender will also require a personal guarantee in addition to additional collateral for the loan. 

Another option for those with 401K funds available is a 401K conversion using a firm like Guidant.  This is a tax free way to roll your 401K over into funds available for the purchase of a restaurant. The pros are that you have no one else involved in the transaction and it can be accomplished in a very short period of time (two weeks or so).  In addition, the pay back is to your own 401K so you set the rate of repayment based on your own terms.

The risk to a 401K conversion is that you are placing part of your future savings at risk for today’s acquisition, something you and your family should fully consider.

Which is the best kind of financing for buying a restaurant?  The one that works for you.  Buyers should weigh their cash flow needs, costs and other pros and cons of each method.


Topics: Financing a Restaurant