* Vendor Terms

Sometimes a vendor will be willing to sell you business on terms. For example, a 10% downpayment followed by future payments from cashflow of business. The vendor will usually retain a lien over assets of business until purchase price is paid in full.

* Loans

There are various sources of loans. For small businesses, your best bet is probably not major financial institutions. Try instead loans guaranteed by U.S. Small Business Administration (or equivalent in your country if outside U.S.) and community banks.

* Third Party Loan Guarantees

If you're short on security, consider possibility of a creditworthy friend or relative acting as surety.

* Credit cards

Credit card financing should generally be treated as a last resort but utilized judiciously, credit cards can be useful for cash flow purposes so long as outstanding balance is paid off each month. Don't use them for asset purchases though.

* Family and Friends

Not a good idea for everyone, but consider asking family and friends to invest in your business.

* Asset Sale/Leaseback

Another good way to raise cash is to sell an asset you have acquired as part of business to a friend or relative and have them lease it back to you. You free up your capital and your friend or family member has an asset-backed security.

* Redeemable Preferred Stock

A good option if your business is held by a corporation and you are prepared to give up ownership equity in exchange for capital. There are securities issues to be aware of here so be sure to consult your lawyer.

=> Cashflow Considerations

Be sure business generates enough cashflow to cover:

* operating expenses; * your salary; * financing costs; and * a reasonable return on investment.

TRAPS FOR YOUNG PLAYERS

If your acquisition takes form of acquiring shares in a corporation rather that a simple asset purchase, beware. In these circumstances, legal entity doesn't change, only shareholders do. This means that if corporation has any undisclosed debts, pending lawsuits and like, these can still be sheeted home to corporation despite change in shareholding.

In addition to these traps for unwary, beware also of overstated earnings, poor employee relations, overvalued inventory and uncollectible receivables.

AVOIDING THE TRAPS

Fortunately there is much you can do to flush out these hidden traps before you commit yourself.

=> Get Professional Advice and Assistance

First and foremost, do NOT attempt to acquire a business without professional assistance of your lawyer and accountant.

=> Contractual Indemnities

Your lawyer will no doubt try to include provisions in purchase and sale agreement whereby vendor indemnifies you for any liabilities accruing prior to date of sale. The effectiveness of indemnity as a protective mechanism depends on solvency of vendor.

=> Due Diligence

The best way to protect yourself is to educate yourself about exactly what it is you're getting yourself into. Your lawyer will guide you through due diligence process which is nothing more mysterious than asking right questions and making sure you get right answers.

Here's a checklist of things that your lawyer will help you do during due diligence period:

* Find out why seller wants to get out of business. * Review operating information. * Review all contracts to ensure there are no hidden liabilities. * Get a list of all assets being sold including fixtures and equipment, patents, copyrights, trademarks etc. and make sure they are free of all encumbrances. * Get a schedule of all debts of business that you will be assuming. * Check company's articles, bylaws and corporate minutes to ensure company is what vendor says it is. * Check to ensure company is in good standing. * Get a list of shareholders as well as any special rights, stock transfer restrictions and pledges that may exist against assets of business or stock. * Check all financial documents including bank statements, audited financial reports, and bank and financing agreements to ensure there are no undisclosed security interests. * Physical inventory and inspection of all assets.

Acquiring an existing business is a major undertaking and one which must be accompanied by competent, professional advice. Assuming that you complete thorough due diligence so that you understand EXACTLY what you're acquiring (liabilities as well as assets), you may well find that despite funds you invest, it's most cost-effective way to go!