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.
- Buyers should make sure to check their own credit and clean up any outlying issues.
- 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.
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.
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.
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.
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.