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.
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