other frequently asked questions

Financing the Deal

 A business sale is completed when a buyer and a seller agree on price and terms.  Once a price has been determined, the buyer must look at how they will fund the purchase.   This funding is usually a combination of buyer cash (equity) and bank financing.   Often the deal may incorporate some vendor financing or take-back (VTB).  

 NO seller wants to do vendor financing, nor should they unless absolutely necessary.   Vendor financing is often a key issue however, and is a consideration in the majority of deals involving the sale of businesses.   In order to assess whether some vendor financing may be required to sell a particular business we must first consider the options available to a buyer from outside sources including lending institutions and private equity sources.  

 A significant amount of conventional bank financing may be difficult for a buyer to obtain.    Banks look at a number of factors when making a lending decisions.   One key aspect is the hard asset base of the business.   Banks will typically lend 70% to 85% of the current “fair market value” against capital assets such as furniture, fixtures, equipment, land and buildings for security purposes.   A portion of leasehold improvement value in a rented business location may be financed in certain cases, however it is next to impossible for a lender to realize on that security in the event of a default so there is an inherent reluctance to lend on leaseholds.  In businesses where inventories are a significant component of value, financing can be difficult.   Banks will typically lend between 40% to 60% of value depending on the relative ease of liquidity of that inventory.   Goodwill is often a component of the value of a business and banks will almost never finance any portion of this value regardless of the cash flows of the business.   Banks are, and always have been hard asset-based lenders. 

 The other key area that banks look at is the cash flow of the business.   Underpinning any lending decision, the banks will look at the ability of the business operations to support any debt-servicing that the bank financing requires. If the business is under-performing, the banks will typically not lend even with securable assets available, unless the buyer is able to produce a business plan that demonstrates an opportunity for the business to grow.   Even then the banks will look outside the business assets an look to personal assets of the buyer or other private backers to further secure any loans against the business assets.

 Private equity sources are typically companies or individuals that provide investment in return for an equity position in the business, or in the alternative, a loan to the company that may have the option of conversion to equity at some future point in time.  Generally These sources are typically looking at larger dollar investment placements (generally $2 million and up).   The effective cost of this type of funding to a buyer is considerably higher than bank lending rates, but can be effective in funding businesses with high cash flow and/or growth potential but low  hard asset levels.

As a broker, we must make our selling clients aware of the realities of market financing potential for their specific business.   If the potential for a significant component of bank financing does not exist, then the seller must accept the fact that some component of vendor financing will likely be required in order to complete a sale.  Waiting for that elusive all cash buyer with “deep pockets” is often an exercise in futility for all parties involved.    It is our job to make sure that the amount, repayment terms and security of the vendor financing are as reasonable as possible.  

 Patrick S. Preston, Agent

Business Brokerage Specialist