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Home > Tools and Resources > Ask the Expert > Should Buyer Use Home Equity to Buy a Business?

Should Buyer Use Home Equity to Buy a Business?
Buyer's wife is apprehensive about mortgaging house to buy a business. Should buyer look for other financing alternatives?

By Richard Parker | Diomo Corporation
Contact Richard Parker | Visit Website | About The Author

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I have found what I believe to be a wonderful business but there's one problem: I really do not have the necessary money for the down payment. The asking price is $650,000 and the seller will finance $425,000 to a 'qualified buyer'. I only have about $100,000 available in cash. The seller and I get along very well. I have about $200,000 in equity in my house but my wife is very apprehensive about getting a second mortgage. The business makes about $250,000 a year. What would you do?

I don't think your wife is going to like my answer so let's first examine the alternatives. Assuming that you have checked the business as thoroughly as you can at this stage, and it meets your criteria, then it is certainly worth exploring several scenarios:

Getting the seller to finance more:

Have you discussed this possibility with the seller? Although they are financing a substantial portion, perhaps you can explore this option with them and even consider using your home equity as a partial guarantee on the additional financing that they are currently offering. As an example, you now face a $125,000 shortfall. If the seller would considering financing this portion, they could get a second lien position on your home as security for this amount which would still leave you with $75,000 in equity and the financing you need.

SBA Loans:

If the historical financials can support the debt, this seems like an ideal candidate for an SBA backed loan. While there are certain criteria that need to be in place for both the business and you, at face value it would seem to meet these. Furthermore, it is well worth you exploring this option. Based upon the SBA and lender guidelines, you have what is needed for a down payment under their general guidelines, and with seller financing in the deal it will bridge any gaps that may exist. I would recommend that you contact a local Preferred SBA lender and discuss the deal with them.

Mortgage the House:

Even though your wife may not be crazy about this idea, it is a solid fall back plan should the two scenarios noted above not materialize. While I do understand your wife's concerns, it is critical that she is 100% on board with this decision. Although you are buying the business, she's in this as well. From a financial perspective, the potential return that you can make on your investment by utilizing your equity to acquire the business and generate an excellent income, is far superior to other investment vehicles. Nevertheless, it is something for you and your wife to discuss. Personally, I always like to leave the home out of an acquisition unless it's my only option but I would always be prepared to do so if the opportunity makes sense.

Get more expert advice in Richard Parker's How To Buy A Good Business At A Great Price - the most widely used reference resource and strategy guide for buying a business.

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About The Author
Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.

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