We frequently have customers call for information about businesses and in the course of finding out what they are looking for, and what they have for money, we are told that they have “backers”.  Sometimes it is a relative, sometimes it is a close friend, and other times it is a casual acquaintance.    They very often become upset with me when I tell them that in our experience “Backers always back out”.

I usually suggest that we will work with them when we have specifics about who the backers are and what they specifically will do.  Then we ask them to bring their backers to meetings and showings so they can be involved right up front and throughout the process.

There are lots of horror stories shared between brokers about this phenomenon.  One broker told me a story about having one customers eight business associate backers sign letters committing them to support, and then having them all pull out after he had worked a long time on the deal.

While such experiences are time wasting for us, the impact on the customers who are often embarrassed, disappointed, and have wasted a lot of time, can be really depressing.

That is not to say it is impossible to get family and friends backing.  I had a deal not too long ago where family and friends put up 100% financing, almost $200,000, for a couple to buy a business.   Just be prepared if you are a customer trying to be a buyer to have brokers be skeptical when you say you have backers.

The following is an excerpt on the subject from a blog by Richard Parker of the Diomo Corporation on the subject.  Richard (no relation) writes extensively and publishes guides for use in buying and selling businesses based on many years of buying, operating, selling and brokering sales of small businesses.

“Getting the Money from Family and Friends When Buying a Business

Getting the money to buy a business is, oddly enough, one of the things that many buyers leave for the last minute. Perhaps it ties into the incorrect perception that traditional lenders have their vaults open ready to hand over money to you to buy a business.

Unfortunately, it is not the case. Not even close!

Today, I received an email from a website visitor explaining he has found a business, negotiated the deal and now is absolutely stunned and stuck to learn that his “investor”, his Uncle Max, doesn’t want to lend him the money.

This financial backer initially told him “I will lend you the money – don’t worry” (I really wish they had read my course because here’s what they would have learned):

If you are planning on having friends or family members finance your purchase, you need to understand it is a business deal. More importantly, you must be sure that they will be there to write the check when you need it. It is very easy for somone to off-handedly promise you the money, but it is a whole different ballgame when the time comes for them to fork over the cash.

If you are considering getting financing from your “Uncle Max”, keep a few things in mind:

  • Make sure Uncle Max’s criteria for agreeing to finance you is completely aligned with the type of business you are looking to buy.
  • Nail down the deal details with your financier before you begin negotiations with any seller.
  • Lay out very specifically what Uncle Max expects in return for his investment. Is it equity, debt, and what are the note terms, etc.?
  • Involve him in the process. Keep him updated. Analyze companies together. If a particular business is not of interest to Uncle Max, you want to know it early on.
  • Be completely upfront with any sellers or their brokers about the source of your financing. Simply telling them “My Uncle Max has plenty of money and will finance the deal” is not good enough.
  • Get Uncle Max to provide you with a letter acknowledging they will assist in the financing, and have him provide you with a Personal Financial Statement that you can offer sellers as proof to back up your claim.

While family and friends who offer to lend you the money are well-intentioned, and may even come through with the financing, do yourself a favor and don’t put your entire future in Uncle Max’s hands. There are many options available to finance a business. Learn what these are beforehand. When the right opportunity arises, you want to be in a position to pounce on it and get it done!”

You can find other interesting commentary by Richard Parker on: http://blog.bizquest.com