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.|
©2011 International Business Brokers Association (IBBA) all
rights reserved. Permission to reuse any or all of this material should
be directed to the IBBA at 888-686-4442 and is restricted to IBBA
members.
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
