Posts Tagged ‘business acquisition financing’
Buisness Structure For Acquisition Financing
July 29th, 2010
“Try To Say Open To All Your Business Structure Options When Seeking Acquisition Financing”
When a buyer or existing business acquires or buys another existing business, there are basically two ways to go about it. You can purchase the shares of the company if its incorporated or you can purchase the assets of the company.
In either case, you will have to decide who the actual purchaser or buyer will be. For example, will you set up a New Co to purchase the shares or the assets? Will the shares or assets be acquired by your existing company, or by yourself personally?
There can be several different options that can be considered for tax purposes, estate planning, liability protection, and so one.
Unfortunately, one of the structure considerations that often times doesn’t get worked into the decision making process is what is the best structure for acquiring debt or equity financing to provide some or all the necessary capital to complete the transaction.
Lenders and investors are going to have their own take on this subject to allow themselves to better protect their risk and optimize their security position. Which is why its not a good idea to jump too quickly into what the post acquisition business structure will be before gaining a solid understanding that the business financing you will require will be available for both the go forward business opportunity and the manner in which you plan to structure the deal.
Its not uncommon for a good solid acquisition to have trouble getting financing due to the manner in which the go forward ownership is structured on both a stand alone bases and in relationship to the existing business entities and/or personal holdings.
As an example, its a common practice on an asset purchase to complete the transaction through a New Co. But a new company will not have any established credit and without the backing of a sufficient corporate or personal guarantee or additional security pledge, the deal may not get approved and funded.
The working assumption that anything you can come up with respect to business structure and security for an acquisition can get financed for the terms and conditions you’re seeking is flawed.
The relevant lender and investor requirements at a given point in time for a certain type of acquisition scenario should also be factored in before any final papers are drawn up.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Business FinancingAcquistion Financing Madness
June 25th, 2010
“Vendors Distorted Sense of Business Acquisition Financing Reality Kills Deals”
Ok, so perhaps a descent into madness is a bit harsh, but when I see some of the things vendors do to sabotage their own deals, it truly makes me cringe.
Here’s an example.
A buyer calls me up this week and he’s trying to get a business purchase finalized. The company to be purchased is service based with a high percentage of goodwill in the purchase price. Typical of these types of deals, the buyer is putting in money, a lender is prepared to put in money, and the vendor NEEDS to put in money.
All parties are in agreement with the deal, except for one thing. The lender does not want the seller to get paid out too quickly and drain the available cash out of the company and is asking for a delay in vendor principal and interest payments for 1 year.
This is hardly an unreasonable request as no lender (or buyer) wants to be left with a cash strapped company within a year of the loan being issued. Because there is so much goodwill in the deal, there is very little real tangible security, so if there are any cash flow hiccups, both the buyer and lender are going to be … in the soup.
But in this particular cash, the vendor is prepared to kill the deal over this, so the buyer is calling me up trying to locate another source of acquisition financing.
News flash to vendors of the world
This is a good deal.
In this case, the vendor would get 70% of the purchase price on closing, and start getting repaid on the remaining 30% in 12 months.
While this is also a typical deal structure for this type of deal, in many cases the vendor will not consent to any amount of vendor financing, especially anything that will place them in a security position behind the primary lender entering the picture.
Usually a vendor will have to go through two or three potential buyers before they realize that 1) likely no one is going to purchase their business for cash (everyone wants to leverage their investment) and 2) no lender wants to take the majority of risk, especially for a thinly secured deal.
Once reality starts to sink in several months later, after a number of false starts, the vendor starts becoming a partner to the deal and considers taking on some financing risk.
In the mean time, money has been wasted on accountants, lawyers, and other advisory costs, not to mention lost opportunity for potentially both buyers and the seller.
So my advise to the caller was to go talk to the vendor and work it out. Any new lender I could bring to the table would offer a similar deal. And if they were to realize the current offer was on the table, they wouldn’t consider the financing request at all based on the strength of the loan commitment already offered.
Next to start up financing, acquisition financing is the hardest to arrange. So when you’ve got this type of deal in hand, grab it hard and don’t let go.
Why?
Because the likelihood of a better deal being out there, right at the moment you need it, is slim. And if you take too long deciding, the lender may pull the deal off the table leaving you with nothing, leaving you to start the process all over again with the next buyer.
Madness
Click Here To Speak To Business Financing Specialist Brent Finlay
Business FinancingThe New World Of Small Business Acquisition Financing
April 14th, 2010
If you are a buyer or seller trying to complete a purchase or sale of a small business, especially for a service based business, you hopefully will already be aware of how to approach the process of financing the transaction.
If its not a cash purchase, and additional financing is required, both seller and buyer need to be prepared to self finance the deal. Basically the combination of cash and vendor financing will be all that’s going to work in a lot of cases.
Third party lenders have very limited interest in these deals as the transitional risk to the ongoing business is statistically high and there is very little if any hard security of value available to a lender to secure their lending position.
The current recession has dried up most of the sub prime business debt that is typically based on the historical cash flows of the business. Even when these loans are available, the lenders expect both the vendor and the buyer to be making significant contributions to the financing package, so even in the best case scenario, a third party lender will only provide 30% to 50% of the purchase price.
Lenders will also require the vendor repayment to be done over a longer period of time than typically expected by the vendor in order not to drain the business of cash and equity in the short term which can impact the longer term business health.
And any debt financing that may be possible to arrange is going to require a lot of third party accounting support of the last three years business operations before a lender is going to be comfortable with the strength of the underlying business. If the vendor has not invested sufficiently in third party reporting, its unlikely that the buyer is going to be able to secure any affordable business financing for the acquisition.
The biggest challenges right now in the market is that buyers are searching for financing that either doesn’t exist or that can’t be secured with what the vendor is got available to support historical financial performance.
The key take away is that the buyer and vendor need to try and figure it out themselves, or work together to try and get a third party lender to provide some of the financing to get the transaction closed.
For a acquisition financing to be secured, the final capital structure needs to be a win for buyer, vendor, and third party lender.
For assistance with acquisition financing, call business finance specialist Brent Finlay
Business FinancingBuying a Business Requires Time, Money, and Patience
February 14th, 2010
If you ever start going down the road to business acquisition or buying a business, where third party debt or equity is required, then there are some things you should likely be aware of.
First, outside of a start up, the financing of a business purchase is arguably the most difficult type of business related financing there is. Why? Because there can be lots of moving parts to try to understand each of which can have either a positive or negative impact on the business. The goal of the buyer and third party financier is to accurately assess the current health of the business to make sure it has the ability to grow and prosper in the years ahead, versus being on a steep decline with little hope for the future.
Second, because each situation is somewhat unique, any financing secured will be customized in some manner to fit the situation. Customization always takes longer than something you just pull off the shelf which means you’re going to have to allow for probably more time than you anticipated to get business financing in place.
Third, while its possible to secure debt or equity financing with little or no money down, its not highly probable in most situations. Statistics will show that unless the buyer has a significant financial risk, there is a greater likelihood of business failure due to the fact that when the going gets tough someone with less to lose personally is also less likely to fight through the adversity to achieve a better result. With little to no down payment in the deal, the walk away costs are not very high, creating the opportunity for the buyer and now new business owner to fold the tent quickly if things are not going well with the business.
Fourth, when goodwill is involved, there is an expectation by lenders and investors that the vendor will cover all or part of the sale price pertaining to goodwill. Without this involvement by the vendor it will be much harder and perhaps impossible to secure third party financing of any sort.
Fifth, because capital may be required from a third party source, the vendor, and the buyer, it can be quite difficult to come up with a comprehensive financing plan that works for all parties. Lots of patience is typically required to work through everyone’s requirements and manage through the trade offs and compromises that will inevitably be required to complete the deal.
Also, many times things just won’t be a good match among parties, so you also need to access the goodness of fit quickly and if its not likely going to be present, then cut off negotiations and move on to the next potential deal. This is another form of patience whereby the buyer needs to never get hung up on any one deal, but focus on their buying criteria and the deal quality for all parties.
This may require looking at several deals over a period of time, working through them one at a time in order to get a good result.
Click Here For Help With Buying a Business and Getting it Financed
Business FinancingFinancing Of A Business Acquisition Requires Some Education
January 12th, 2010
The process of locating and securing financing for a business acquisition tends to be the second most difficult form of financing to acquire after start up capital.
The degree of difficulty associated with acquisition financing has much to do with the concern a debt lender or equity investor has with how a change in ownership will impact the future financial health of the business.
In order to get comfortable with the transaction, there can be a considerable amount of due diligence and analysis required by the source of capital. Understanding these requirements can go a long way to successfully financing a business purchase of shares or assets.
So the starting point for a buyer is to acquire some basic knowledge of the process and to potentially acquire a financing specialist to serve as a coach in order to better approach the whole business financing process.
Lack of basic knowledge tends to result in unnecessary adviser costs and deal fatigue which usually leads to deal failure.
So what type of basic education should be considered?
First, the buyers need to develop an understanding of how deals get financed and basic deal structure. One common misconception buyer’s tend to have is that presenting a signed letter of intent from both parties to a lender or investor will be sufficient for the capital provider to generate a commitment upon completion of their own due diligence.
From a lender or investor point of view, a letter of interest is a non binding agreement that does not fully describe the transaction and related conditions which will need to be fully understood before a commitment is forthcoming (which only makes sense it you think about it).
Second, the buyer needs to develop a sense of the type of support information that needs to be present to support third party financing. The more third party financing requested, the higher the quality of available information needs to be to support a positive decision. As an example, sellers commonly show their last year immediately prior to sale to be the most profitable on record to support a higher sale price. However, from the perspective of a financing source, the historical financial statements need to show some sort of structured pattern of revenue generation versus the manipulations that can take place in the year leading up to a planned sale.
Furthermore, the external financial statements should be prepared by an accounting firm with a strong reputation and the accounting statement likely will need to be “review engagement” or higher, depending on the level of financing requested.
Third, if the buyer wants a high level of leverage, he is likely going to need vendor support in terms of a vendor loan as well as the vendor’s willingness to adapt the final terms and conditions of purchase to suit the requirements of third party lenders and/or investors.
Because of the uniqueness of each potential deal, buyers should consider utilizing the services of a financing consultant that can help the buyer 1) quickly ascertain if the deal can be financed, and 2) assist the buyer with the project management required to get the financing in place and the deal clsoed.
Business FinancingBusiness Acquisition Financing | The Devil Is In The Details
December 9th, 2009
Attention To The Details Can Make Or Break Your Quest For Business Acquisition Financing
Arguably one of the most difficult forms of financing to secure is business acquisition financing.
The degree of difficulty has a lot to do with the fact that many business acquisitions of small and medium sized businesses fail after the change of control takes place, making financiers more Leary of this type of business financing request.
But don’ t despair if you’re in the process of trying to locate and secure capital for an acquisition. Financing is available and there is a solution for making sure that you get your hands on the money you need.
Simply put, you need to make sure that you’re focused on the details of the deal.
A lender or investor considering advancing capital for a business acquisition want to see that all change of control issues are properly addressed, all risk areas are covered off, and that there is a solid plan of action going forward led by a well informed and competent individual(s).
Basically, they really are going to get into the details.
- Can all customer and supplier contracts be transferred or assigned to the buyer?
- I s there sufficient working capital in place to operate the business and allow for contingencies?
- Is there any outstanding litigation that could impact future business?
- Will the seller provide support and training?
- Are there at least 2 years of financial projections (income statement, balance sheet, and cash flow) that are based on sound and supportable assumptions and also logically bridge from past performance?
- Will there be any assignment of existing debts?
- Are government remittances up to date if its a share purchase?
- What is the orderly or forced liquidation value of the equipment?
- If there’s real estate, what’s the appraised value and has there been a recent environmental assessment made?
And so on, and so on, and so on.
Basically, the details. Could be just a few… likely more in the line of several pages.
And in many cases, potential financiers are asking you to provide your due diligence assessment of all the things you should be worried about anyway regarding the proposed purchase, which can actually be viewed as a good thing.
After all, no buyer wants to invest their hard earned money and time on a failed venture. While there is never a guarantee of success as anything can get screwed up or get blind sided by unexpected events, covering off the obvious issues right in front of you is a good starting point on the road map to success.
Unfortunately, many prospective buyers don’t sweat the details and at times want to dive right in where angels fear to trend. And that’s exactly why they don’t get any financing.
The details can be a real pain. It takes time to deal with. It costs money to work with qualified advisors.
But the risk of not sweating even the smaller stuff can be catastrophic in nature when you’re trying to take on a business that you have never operated and will have much to learn about in the early going of ownership
Business FinancingAn Often Forgotten Source Of Business Acquisition Financing
October 6th, 2009
Before Seeing Your Banker About Business Acquisition Financing, Perhaps You Should First Talk To the Vendor
More and more business acquisition financing is provided by the actual vendor or seller, not just your banker. And in many cases, bankers will not even entertain providing acquisition financing unless the vendor is contributing some amount of financing as well.
This is especially true with purchasing a small business where a good portion of the sale price is tied up in Goodwill. Most lenders will not finance 100% of the goodwill. Actually, most lenders won’t finance any goodwill without some amount of additional security, guarantee, or surety from the buyer.
The lenders logic is that if the vendor is so certain that the value for goodwill in the purchase price is valid, then they should have no problem providing the financing by basically deferring the portion of the proceeds earmarked to goodwill until an agreed upon time in the future.
There are a couple of other reasons why vendor financing is more common for acquisition financing than you may think.
First, any purchase and sale agreement I’ve ever seen always has some form of recourse present to protect the buyer against mispresentations of the seller and vise versa. By having the vendor provide some amount of financing towards the purchase, there is effectively a recourse fund in place which further protects both the buyer and any potential lender that also gets involved.
Second, by having an active stake in the business being sold in the form of a vendor loan , the vendor is highly motivated to provide a seamless transition to the new buyer as well as ongoing support if required.
Many times, the vendor will take the money and run after the completion of sale and payment of all the proceeds, leaving the buyer to deal with any unknowns or transitional problems that might arise. And depending on whose statistics you subscribe to, one of the top reasons for the failure of acquired businesses is due to poor ownership and management transition.
Vendors tend to not want to provide financing if they don’t have to, which only makes sense. However, failure to be open to vendor financing can also leave businesses unsold for several years as potential buyers are not able to secure enough lender financing without the vendor being involved.
Business Financing