So Close … Yet So Far

Entrepreneur, Oct, 2000 by Doug Hood, Marilea S. Hood

You're buying a business, but your banker won't loan you the full amount--here's what to do.

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.

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.