Thursday, August 30, 2012

Creative Financing for Buyers Looking to Purchase a Business

The evaporation of small business capital markets and other economic factors have made creative financing the norm for today's business buyer. During these turbulent times there are a number of creative financing options that you can consider.

Seller Financing - Increasingly, buyers and lenders are looking to the seller for financing as they try to put a transaction together. In such a scenario, the seller will hold a note at an agreed upon interest rate for a specific term or amortization – generally ranging from five to 10 years. The terms of the sale may include a balloon payment three to five years after the purchase date. It’s a way of giving the buyer time to get up and running and to establish a successful track record with the business. Seller financing makes the bank more comfortable with the transaction. Lenders know they have a seller who has a vested interest in the success of the business rather than one who will take their money and run.

SBA Loans - In sales of a business, conventional loans usually aren’t available, so a buyer may want to consider going to a Small Business Administration (SBA) lender, which has a number of loan options. The SBA guarantees a portion of the loan. The buyer pays an SBA loan fee that allows them to get funding for a loan the bank couldn’t do conventionally. If an SBA guaranteed loan goes into default, the SBA will pay the lending institution up to 75 percent of any deficit left after liquidating the collateral. There have been several changes to the Small Business Administration's lending guidelines and standard operating procedures in 2009. You will want to speak with an advisor who is familiar with these recent changes.

Earnouts - Earnout financing involves a certain dollar amount agreed on by the buyer and seller to be paid to the seller based on the performance of the company after the transaction is completed. Earnouts can be structured in a variety of ways and can be based on different financial benchmarks such as a company’s revenues, gross profits or net income. Earnout financing is often used for companies that are in a turn around situation or when buyers are purchasing on potential, rather than on historical cash flow.

Mezzanine Financing - In mergers and acquisitions, mezzanine financing is another alternative for a buyer looking for capital where the financing package may include interest rates of 20 to 30 percent. The lenders in this situation are typically high net worth individuals who are expecting a larger return on their investment. They are lending in a junior lien or a position behind the bank and seller financing. The loans are typically made with limited sources of collateral, thus the request for higher interest rates. Again, this financing is often used in funding goodwill or reputation in an acquisition.

Funding Scenario - In a million dollar transaction, the buyer would be expected to have a 20 percent down payment. The seller may hold an additional 10 to 20 percent in seller financing, and the lending institution would offer a combination of conventional or SBA financing to cover the difference, depending on collateral available. A buyer and the lending institution must evaluate a company’s cash flow and determine if it is adequate to cover their debt service and provide a reasonable return on their investment. Lending institutions will also be examining whether a buyer’s coverage ratio, or excess cash flow after all debt is paid, is adequate to cover their needs.
Even if you’ve been affected by a downturn in the economy in some parts of the country, don’t let that stop you from considering your acquisition options. Creative financing tactics are becoming more common.

Talk with a business intermediary representing the company you are considering purchasing. They’ll know if the owner is willing to consider seller financing, earnouts or other creative financing ideas. Based on your available capital, the business broker should be able to tell you whether you’ll be considered for the purchase and may also provide you references to various lenders that are familiar with financing the purchase of a business.

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The International Business Brokers Association is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.|


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For a complimentary consultation:
Contact 
Cecil Williams (cecil@bizbrokerflorida.com) or call  at 888-925-5055 ext.206.  Visit my personal website to search for business for sale in Florida www.bizbrokerflorida.com  Also, visit our Florida Business Exchange website at www.fbxbrokers.com

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