This is Part 3 of a three-part series entitled “Don’t Just Close Your Doors” in which we provide options for business owners struggling with the effects of the shutdowns and who see no option other than shutting down. In the first article in this series, I urge business owners not to focus on the current cashflow of the business (which is likely not great, given the state of the economy) and focus instead on the sources of potential value in their business – client lists, location, intellectual property, existing contracts, and business systems. After determining the value in your business, the task is then to find a potential buyer. In Part 2 of this series, I identify some great potential buyers – current management and employees, direct competitors, and “strategic” buyers – companies that would achieve efficiencies and synergies in adding your business to theirs.
Financing the Transaction
So you’ve found a few interested buyers – now the big question: can they afford the price-tag? Your hope is that they can, even if it means getting a little creative with the methods of financing. My hope is that this article might give you some options to work with in designing the deal. If you have further questions about designing the financing of the deal, please get in touch with me at firstname.lastname@example.org.
If you’re lucky enough to find a buyer who will offer you cash for your business, this is obviously the easiest, and most desirable way for a seller to receive payment for their business. Look no further – get in touch with your favourite accountant and business lawyer and start drawing up that purchase agreement!
Bank financing may or may not be an option depending on your buyer’s circumstances and the circumstances of your company. Whenever a bank loans money, it needs to have “security” for its loan – in other words, something of value that they can go after if the borrower defaults on their loan, like a property, investment accounts, and so on. If your buyer has sufficient equity in real estate, cash investments, or other assets, they may be able to get a loan for a portion, or all of the purchase price. The bank may also look to get their security from the business itself – if your cashflow is not strong due to the pandemic, they may need to look at whether the assets of the company will provide enough security for a loan. If the bank uses your assets as security, you are literally taking a loan on your own business to pay you out a portion of, or all of, the purchase price while the buyer takes over the business. In this scenario, banks will usually require that the buyer also has “skin in the game” – in other words, a significant enough investment in the company and likely a personal guarantee, so that they won’t simply walk away and leave the bank hanging.
Vendor financing can be a tough thing to get one’s head around, because it literally involves you as the vendor loaning the buyer money to complete a purchase of your business. This is the least ideal situation for a vendor, as it involves the vendor carrying the most risk. However, it does allow the buyer to pay you out over time, effectively giving you a regular, guaranteed “salary” in exchange for leaving the company and handing it off to the buyer.
In a full buy-out financed by vendor financing, the buyer will provide a promissory note for the full value of the purchase price and will then begin making periodic payments ot pay down the loan, as negotiated between you and the buyer. Just like the bank, you will obviously want some security – a personal guarantee over their assets, a mortgage against real estate they own, and so on – anything to ensure that they won’t simply walk away from the business when they are not able to make payments.
A management buy-in might be a creative way to begin selling your business to the people who know it best - your managers and other employees. In a management buy-in, employees buy small percentages of the company’s shares at a time, with the intention to eventually buy you out completely. This can be done by agreeing to use bonus money to buy shares, or a portion of their wages to buy shares, or even just options to purchase shares at a certain price. If your managers and other employees are very engaged in the business, this may be an easy way to transition the business to people you already know will run the business well.
Realistically, the deal you put together will likely be a combination of all three main sources of financing – a little cash to make sure the buyer has skin in the game, a little bank financing to make sure you get a decent payout on closing day, and a little vendor financing to carry the remainder of the purchase price.
If you have a prospective buyer and you are looking to craft a deal that will work for both buyer and vendor, get in touch with me at email@example.com and I will happy to answer any questions you may have.
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