By Anthony Cullins

Seven (7) years ago, The Vant Group represented a seller who was anxious to sell his business so he could enjoy the fruits of his labor.

Like most sellers, he had a number in mind that he wanted for the business and was not too keen on the deal structure so long as the purchase price matched the desired asking price. We were able to secure a buyer who offered the seller the number he wanted, however, it included a significant amount of seller-financing. Despite our urging for the seller to consider slightly lower offers with more guaranteed upfront, the seller decided to take the higher seller financed offer.

Everything was going great for the first few months. Then about six (6) payments in, the payments stop, and the buyer goes into default. The TVG client spent eight (8) months and over $100,000 in litigation costs to resume control of his business, which by then revenue was down 50%.

Solution

The TVG client worked hard to re-establish his business and slowly built the business back with revenue and cash flow stronger than before. TVG successfully helped the client sell the business again (with very little seller note).

Key Takeaways
  • Price is one thing but the terms are another. You have to balance both.
  • Trust your gut in judging the character of a potential buyer.
  • Chose a business broker with care and listen to their advice.

By Anthony Cullins

No one wants to be blindsided by real estate issues during a business transfer.

Many business owners use leased real estate to house their company. There are benefits to having someone else deal with the maintenance, general upkeep, and curb appeal. Make sure to do your due diligence if you ever what to sell your company, because leased real estate adds homework to a business transfer.

Before ever putting your business on the market, you need to be familiar with the legal language in your lease.

Most facility leases will address the issue of assignability of the lease.  Many will allow the lease to be assigned but usually “only with written permission from the landlord.” You also hope to see the phrase that the landlord’s permission “shall not be unreasonably withheld.“ In addition, there may be provisions explaining that the landlord needs to approve a new tenant. There also may be notification time frames stated, as well as the landlord’s required response time. It is also possible there will be transfer fees associated with obtaining the landlord’s approval.

Typically, if a lease is assigned to a new tenant, the original tenant remains liable in the event of a default by the assignee. The implications are if the buyer struggles after acquiring your business and stops making payments on the lease, the landlord can look to collect lease payments from you for the remainder of the lease commitment.  In the final definitive documents of the business sale, you will likely have indemnity clauses in your favor from the buyer. Though you have the legal right to do so, there is no assurance that funds will exist to reimburse you if the buyer defaults on an assigned lease. A business broker can help to structure your transfer to cover these types of contingencies, so make sure to provide them with all the facts.

There is another complicating factor.

If the buyers’ financing is based on an SBA loan, the SBA will require the lease term, including tenant options, to match the loan term. This is usually either seven (7) or ten (10) years. That can be favorable for landlords because they can use that fact to achieve longer-term lease commitments. However, the option has to be the tenant’s, so that creates an offsetting factor.  The real difficulty arises if the landlord has other plans for the leased space and is not willing to negotiate a lease term to match the loan term.  Also, some landlords will use that prerequisite as leverage to try and negotiate unreasonable lease terms.

So to recap, make sure you go through your lease thoroughly. Speak with a lawyer to clarify any language that might be confusing, and talk to your landlord in plenty of time so no surprises come to the table on your way to closing. Using the right M&A company to broker your deal will not only help to get these issues in the light of day early, but they can also structure a deal to make sure you are covered in many if not all eventualities without heartache.


By Dirk Armbrust

Challenge: A business owner was considering selling and retiring while still wanting to secure a future for his son who worked in the business

A manufacturing business owner was introduced to The Vant Group by his attorney.  The owner was approached by a private equity (PE) firm wanting to buy the business that he and his wife owned and whose son worked as a key operations manager.  The timing was good for the owner and his wife, but they were concerned about their son’s future.  Along with the normal stress associated with selling a business, they had multiple questions on their mind:

  • Would the PE firm lay off the son after the sale?
  • Would the PE firm provide an opportunity to stay and grow with the business?
  • Would the sellers be “penalized” when the PE firm adjusted the price for the son’s ongoing salary?
  • Was the PE firm’s offer strong enough to justify not listing the business in the open market?

We addressed the last two questions first.

We conducted a valuation assessment of the business.  Our analysis indicated that the PE firm’s offer was strong but not significantly above what the seller could expect from any other buyer.  We coupled this point of view with our expertise on current market conditions and salability of their particular business.  (If you haven’t heard, we are in a “seller’s market”.  There are many more buyers than sellers these days.)

Next, we prepped the owner with insight and “bullet points” to allow him to defend against the PE firm trying to reduce the sale price for the future salary of the son.  Because the son worked in an operating role and was adding value to the business, we prepped the seller for the conversation.

Then, we addressed some of the common myths associated with the M&A space.  Oftentimes, sellers worry that buyers (especially PE firms) will buy their business and then lay off a large portion of the workforce in a scorched-earth manner.  This is how M&A is often portrayed in movies, but this is the exception rather than the rule.  As you might imagine, this fear was front and center in this seller’s mind… especially when his son was in the employee population.  However, the simple truth is that today’s buyers are looking for solid, well-run businesses.  Buyers, especially institutional buyers like PE firms, would rather keep the acquired company’s infrastructure in place so that they can focus on growing the business.

Finally, we provided the seller key strategic insight on where they are today from a valuation standpoint, and what things they can do to secure a much higher sales price one to two years in the future.  Based upon this deep dialogue and engagement, the sellers decided to pass on the PE firm’s offer, and focus on growing the business together (mom, dad, and son), to reach their overall goals as a family.

This case is a representative example of how The Vant Group approaches clients.  There is often more to the story than just “how much can I get for my business?”  (Although that is hugely important.)  Things like family and succession planning issues matter.  In M&A transactions, we typically serve as “quarterback” for the “deal team”.  M&A advisors, attorneys, CPAs, wealth managers, and tax planners all have significant roles to play in this critical process.  We ensure all the players are working together to achieve the absolute best, holistic, outcome for our clients.


Does any single customer represent more than 10% of your revenues? 

From an evaluation standpoint, some prospective business buyers would consider a single customer accounting for 10-15% of a company’s sales as a major negative.  Almost all prospective buyers would consider client concentration of 30% or more in just two to three customers as a big problem that would have a significant impact on salability and/or the terms and structure of a sale.

Prior to selling your business, any efforts to reduce customer concentration by diversifying your client base will be beneficial to salability, valuation and maximizing the cash received at closing. If there is a customer concentration concern, a lender may decline the loan or will likely only approve a partial loan to the buyer. This reduced loan amount also reduces the amount of upfront cash that a seller can expect to receive at closing.  To address customer concentration issues, most prospective buyers will try to structure a “contingent earn-out” that is paid to the seller over time and is dependent on the future revenues or profitability derived from the company’s largest customers.  If one of those customers is lost, the seller may never receive the contingent portion of the negotiated purchase price.

Here is a good article that further speaks on the topic: How business owners can mitigate the risk of customer concentration


Printing Money May Not be One of the Options for Financing a Business Transfer, but There are Options Out There.

For small to medium-sized businesses, there are several types of funding sources for financing a business transfer.

Each type is governed by the same basic factors, such as; transaction size, asset base, type of company and cash flow.

When beginning this step of the business transfer, it is good to know that delays in the financial process can be avoided early if certain precautions are taken. So before discussing a buyer’s main funding options, there are some overall matters to consider or prepare.

  1. Buyers should make sure to check their own credit and clean up any outlying issues.
  2. Personal financial statements are also important to have totally complete and ready, crossing all the “T”s and dotting all the “I”s.

A top level view and take away points for each of the main funding options

All Cash Sale

Most sellers will, of course, be favorable to an all-cash offer. It is also a given that an all-cash offer can come with a steep discount. This discount is about 40% of that of a suitable offer with financing.

Owner Financing

Another alternative to bank financing is owner financing. Not all transactions are acceptable for institutional financing, and if an owner is not willing to discount their asking price 35-40% for an ALL Cash Sale, then owner financing might be the only other option for financing a business transfer.

SBA Financing

The Small Business Administration (SBA) is a federal agency that will guarantee a portion of an approved loan. Financially, they only consider the EBITDA and the adjusted EBITDA. They use a strict debt coverage ratio to ensure a borrower will be able to repay the loan, pay themselves a salary and have enough left over for emergencies. Along with cash flow, the SBA looks at the buyer’s industry experience as part of their approval process. A buyer should make sure that the bankers and intermediaries they are using are familiar with this process.

Earn Out

An earn out is a negotiating tool that can off-set the sales price and allow a portion to be paid at a later time with specified positive revenue within a specific time period. If profits decrease, then the earn out percentage decreases. However, if the profits are higher than projected as negotiated in the terms, the earn out does not increase. The reason the earn out will stay at the same amount is because the increase is considered the result of the buyer’s efforts. Therefore, it also justified the higher price the seller was asking. By keeping to their guns, in this scenario, this option works well for both sides.

Conventional Financing

This financing is against the assets in the business or personal assets to collateralize the loan. Financial institutions often heavily discount the value of the assets to protect the bank’s risk. These loans are a great option for lines of credit and real estate loans.

To learn more about funding and financing a business transfer, a copy of Entrance – A Guide to Buying a Business by Alex Vantarakis can be purchased in paperback form or as a download at The Vant Group – Book page.