Posts Tagged ‘business acquisition loan’
Acquistion 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 FinancingFor Acquisition Financing, Historical Financial Statements Are a Valuable Asset
April 18th, 2010
Most buyers who are looking to acquire a business will need or want to secure third party debt financing to maximize the leverage of the business assets and cash flow and minimize their down payment.
Put it another way, all cash purchases are fairly rare with respect to business acquisitions. Even if an individual or company could pay cash, they will likely want to cover off some of the purchase price with debt capital in order to reduce their weight cost of capital.
But business acquisitions can be very difficult to finance with third party debt, even if the required business loan amount is only a small portion of the total funds required.
There are several reasons for the high degree of difficulty securing business loans, far too many in fact to effectively cover off here. Instead, we’re going to focus on one of the key things that kill many business acquisition financing applications and that’s the historical financial statements provided by the vendor.
First, a lender will want to go back at least 3 years, but would prefer a longer view of historical performance. The longer term view of the business may not support the repayment analysis, especially if the near term results are stronger than those 3 or 4 years ago.
Second, especially with smaller businesses, the historical financial statements are done under a notice to reader accounting statement, providing very little if any third party verification of the results shown. For acquisition loan requests, especially those based highly on cash flow, lenders will not rely on notice to read statements.
Third, its not uncommon for the vendor to pull out all the stops the last year prior to sale to make the statements appear as good as possible which can also distort them compared to long term results, creating a lack of lender confidence in the financing opportunity.
Fourth, vendor’s may have several strategies to withdraw cash out of the business to save on both business and personal taxes. These strategies may not be easily identified in the historical results and while the vendor can disclose them so a lender can add them back, vendor’s tend to only focus on what was actually reported.
Fifth, if the business has some amount of cash sale component, its not uncommon for the vendor to not report all sales. The result is that the financial statements understate the real financial performance of the business.
While the buyer is the one trying to secure the financing, the ability to do so will correspond directly to how much the vendor has invested in the historical financial statements. And the ability for the vendor to secure the highest possible sale price is going to likely depend on debt financing which will once again be influenced by the historical financial statements and the accompanying support information.
The key take away is that spending money on a higher level of accounting opinion and bookkeeping that can be more easily verified by the buyer and third party lenders should be considered an asset that can generate a substantial return by allowing the buyer to not only secure debt for the purchase, but a higher level of debt so the down payment does not have to be as substantial and higher purchase prices can be considered.
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 Financing