Successful Exit Strategies Can Involve Both Acquisition Financing And Vendor Financing

Have You Though Through How Potential Buyers Will Finance Your Business In Your Exit Strategy?

So your in the process of selling your business or planning for a business sale in the future as part of your exit strategy.

As you go through the process of getting your business ready for sale, take some time to consider how you can assist potential buyers with their purchase.

While cash sales do occur, most purchases of business assets or shares require financing against the assets and/or shares to be acquired.

If business financing can’t be arranged, the deal will not close and you’re going to have a harder time completing the sale process.

Yes, all business financing applications are unique and draw into consideration a number of factors outside of the business being purchased.  But regardless of the profile of the borrower, if the underlying business acquisition can’t secure financing, there won’t be a deal.

Going one step further, its not unusual that in addition to third party debt or equity acquisition financing, vendor financing may also be required.  Especially in cases where the purchase price contains a portion of goodwill (which is likely in most transactions involving a going concern business operating at a profit), the vendor is expected by many third party capital sources to provide some of the overall financing requirements.

As a vendor, there are two important things to take note of.

First, how much acquisition financing would the historical financial performance of the business, asset value, and present state of being attract from third party lenders and investors?

Second, how much vendor financing is the vendor comfortable providing and under what terms?

In response to the first question, if the business has focused on lowering it’s tax position in recent years and the owner has creatively taken money out of the business, lowering the retained earnings in the process, there may not be as much borrowing power as one might think.  Lenders and investors are going to look at the financial performance of the business over a 3 to 5 year period to ascertain the amount of debt the business can manage.   Recasting of numbers aside to allow for creative accounting and tax reduction strategies, the historical financial performance may not support the type of leverage the buyer expects against the purchase price.

Vendor’s that take this into consideration and create a business financing picture over recent history (3 to 5  years) that supports higher leverage will not only sell their business faster, but also come closer to getting their target sale price.

This is where the second question comes in.  If less acquisition financing is available than expected, the vendor has to either reduce the purchase price or provide more vendor financing.

Too often in deal negotiations, the vendor will provide very rigid vendor financing terms and conditions that are designed to reduce the vendor’s risk, and not the risk of anyone else.  And there are other risks.  For the buyer, if the vendor financing repayment terms are too aggressive, the buyer could risk giving the business back to the vendor it repayment falls short.  For a third party lender or investor, the cash flow stress of an accelerated vendor repayment plan could jeopardize the long term health of the business.

The reality is that any financing package will need to cover off the risks of all parties and that’s unlikely to happen when the vendor provides take it or leave it terms for a vendor financing component before third party acquisition financing is even figured out.

Basically, it comes down to the vendor helping the buyer buy the business.

Acquisition financing can be hard to pin down for some of the very reasons alluded to above.  If the vendor wants to reduce or eliminate the need for vendor financing, then he or she needs to make sure the business being sold can generate as high a level of leverage as possible.

If vendor financing is required, its likely going to have to be coordinated with the third party financing in terms of security positions and debt repayment schedules.

The key takeaway here is that the vendor has tremendous influence over buyer financing which will be the key in a successful purchase and sale transaction in most situations.

About the Author Brent Finlay