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