CREATIVE WAYS TO FINANCE A BUSINESS PURCHASE

By Mark Smock

You’ve just walked out of a business owner’s office, who has grown an established, profitable business that he is willing to sell to you, for very favorable purchase terms, at a fair price, but you have no clue how you are going to raise the necessary capital required to complete the purchase. Sound familiar?

The purpose of this article is to highlight characteristics of acquisition candidates that you should consider absolute “dealkillers”. These are brought to your attention because it is very common and natural to get so far down the due diligence trail on a company you have worked so hard to find, that IS for sale, that is right in your industry “comfort zone” and not see the inevitable financial disaster looming down the road because you became “blind” to what the future business potential will be, versus the potential of what you think it could be!

Most seasoned business buyers will tell you that they are not always looking for “a deal” in a business acquisition, but to purchase a company for reasonable terms that offers a consistent, high return on investment, with little or no buyer competition.

Astute business buyers focus on leveraging their investment dollars first and foremost, seeking to acquire controlling interest in a viable company for the least amount of their own money. Business purchase terms can be very diverse, as can means to finance a deal. Terms of purchase are often perceived by both the business seller and buyer as the most critical link to their eventual purchase agreement, much more so than just purchase price.

Sometimes You Have to get “$ Creative”

When you find an extraordinary business acquisition opportunity that initially exceeds your current financial wherewithal, you need to be get very creative and resourceful, very quickly, to be able to achieve your desired outcome. Again, your objective is to negotiate and finalize a reasonable purchase contract with the business seller, using as much of his or his company’s money, or anybody else’s money you can secure and still maintain management control of the company post purchase.

There are four fundamental areas a savvy business buyer can pursue to attempt to get the necessary funds to finance controlling purchase of a profitable company acquisition:

Business Buyer Personal Funds:

Cash Savings
Liquidate paper investments
Negotiate a private party loan from a friend or family member
Advances from personal credit cards or negotiated delays in outstanding credit card balance payments
Obtain a bank loan secured with high value, personal assets, like your home or car(s)
Negotiate payment delays on buyer’s current outstanding bills
Barter or trade significant equity positions in personal assets for required business assets

Take On Partners:

Aggressively pursue a minority ownership partnership with the current owner
Bring in a trusted new partner – sell him shares in the company
Sell shares of the company to existing employees
Sell shares of the company to existing company vendors or suppliers
Sell shares of the company to other business buyers

Purse Every Funding Source:

Include, increase, the earn out portion from the company’s future earnings
Sell revenue participation certificates (Bank collects/ disburses funds)
Bank loan to the business
Asset loan to the business
Loan from current business supplier(s) or vendor(s)
Finance or sell off all existing excess inventory in the company
Sell high value assets and lease them back or finance them
Sell high value equipment outright and time share or borrow other like equipment
Accelerate company receivables
Factor company receivables
Seek customer deposits against existing orders
Lease a high value asset and get advance lease payments from the lessee
Sell excess or low use assets
Sell the company customer list
Sell on-business-premise concession space
Sell the parking lot land
Sell trademarks or unused licensing rights
Sell or sublet the part of the business building and get advance payments
Sell “junk” or obsolete inventory accumulated for cash

Reconfigure Outstanding Business Purchase Balance Arrangements:

Pursue as much seller financing as possible
Defer the down payment portion as long as you can
Assume more or other liabilities not originally in the purchase contract
Negotiate a value for a buyer’s personal check put in escrow
Let the seller retain all receivables
Discount liabilities due the company for immediate cash payment
See if the business intermediary will finance their transaction commission
Assume seller’s personal debt’s or liabilities
Negotiate extended payment terms with key suppliers
Inventory all primary materials on consignment terms
Finance all acquisition fees involved in the transaction; consultants, CPA, etc

Professional business buyers who have faced a “challenge” like this in their career will tell you that it is no fun being in a situation like this, but they’ll always refer to it as “worth it” when, over time, the anticipated business performance came to fruition and more than justified the initial level of financial risk leveraged to “do the deal”. They rarely mention however, that trying to get all parties to agree to your finance limitations and loan terms, in rapid fashion, simultaneously, can be hazardous to your health! It’s worth a shot, don’t you think?