Business Acquisition Financing ...

Beware of Advisors

Business acquisition financing is right up there with your basic root canal. It may be necessary but it most certainly is not fun.

In fact the overall process for acquiring an ongoing business can be a mind sucking affair, very expensive,and in the end unfruitful.

Let me explain.

We have entered a time when the average age of the small business owner, like the average age of the overall population, is closing in on retirement.

For a small business owner, much of their retirement equity will be tied up in the value of their business operations. The key to a happy retirement will be to get a buyer to pay them fair value for their business and in order to do that, business acquisition financing will likely be required.

So what's the problem?

Well, while there are many individuals looking to purchase a small business, more deals fall through than ever close.

The devil is definitely in the details. Asset vs share sale; indemnification clauses, closing procedures, assignment of proceeds, etc. Even if all the deal structure related details are supposedly ironed out, business acquisition financing may still be required which can take the headaches of closing a deal to a whole new level of frustration.

Why is the process so frustrating?

The answer in many cases is the advisors involved.

That's right, the very people that are paid to complete the deal, are the same ones that kill it.

Let me explain.

All deals have two sides, a buyer and a seller. Both sides have to rely on their third party advisors for advise on such things as legal, valuation, taxation, finance, etc.

Unfortunately, the business acquisition financing issues do not tend to be dealt with in the construction of the purchase and sale agreement, creating sometimes unworkable issues for potential lenders.

When buyers and sellers rely heavily on advisors, there is automatically less chance for the deal to succeed. Why? Because it can be impossible for both sides to agree or reconcile issues between the advisors without great cost and time delays.

The advisors are commissioned by their clients to protect the client's best interest. But in this process of protection, it can be very difficult to get both sides to agree on all issues as both groups of advisors are coming at each issue from the opposite point of view. The result is a deal between buyer and seller in principal that can't get closed.

Even when the purchase and sale agreement does get finalized, there may be terms and conditions that are now not acceptable to your source or sources of business acquisition financing.

If the agreement has to be reworked for the lender, this can be the beginning of the end as it may have already taken the powers of heaven and earth to get everything agreed to and signed off the first time. Making revisions can be like opening Pandora's box with no hope of ever getting it closed again.

If this all sounds bleak and depressing, it is.

The stark reality is that if you're going to buy or sell a small business you need to self educate yourself to some degree before you get started.

Here are some points to consider:

  • Approach the deal on a Win - Win basis. Too often in deal making, one side is trying to pull a fast one on the other and try to come out better that they otherwise would have.

This is a dangerous strategy because no matter what you and the other party agree to in principle, the advisors will weigh in at some point and likely uncover any inequity that was created in the negotiations. Not only does the deal now become more complicated as a new basis for agreement needs to be established, but there may also be distrust forming between the parties, either of which could end up killing the deal.

  • Be the decision maker. There is nothing wrong with getting advise from advisors when trying to close a deal and arrange business acquisition financing. Just don't turn all the decision making authority over to the advisors. Take all the counsel as input and then decide for yourself what issues to bend on and which issues are sacred cows.
  • Select Deal Makers. In many cases, people will defer to the experts they already have a close or loose relationship with without really knowing if they are any good at the type of transaction in question. Unfortunately, a good generalist accountant or lawyer from your local business networking group may not have a whole lot of successful experience in purchase and sale situations that require business acquisition financing. A lack of appropriate expertise on either side, can be fatal to the deal.

Make sure that you select deal makers to work with. A working definition of a deal maker is simply someone who has a lengthy track record for closing the type of deal you are trying to consummate. These individuals have a combination of the right technical ability, relevant experience, and ego control necessary to truly add value for the money you're going to have to pay them if the deal closes or not.

With respect to the last point, a deal maker is someone who can work with an overblown ego on the other side of the deal without compromising their client's position.

  • Pre-Qualify the business acquisition financing requirements. Make sure that the buyer has the means to acquire financing. The buyer typically needs to have 1/3 to 1/2 the purchase price as a down payment, depending on the industry and the hard assets being acquired. Good credit and a solid net worth can also be requirements for suitable commercial finance programs. The seller needs to be prepared to work with different financing options before getting too deep into due diligence. Will a vendor take back be required? How long is the vendor willing to assist with the business after sale? How much working capital is the vendor draining out of the business?
  • Consult a financing consultant. Whether you're the buyer or the seller, there is great value to talking the potential deal over with a financing consultant before your accountant and lawyer start running up their tab respective tabs.

From the seller's point of view, a financing consultant can be invaluable in providing insight as to how to get the business in a financial position. From the buyer's point of view, a financing consultant can provide guidelines as to lender requirements. In either case, there is no sense going through all the potential aggravation of closing a deal if its unlikely to attract the necessary business acquisition financing capital.

  • Become blood brothers (or sisters) with the other side. A close working relationship between the buyer and the seller can stop the deal from going down bunny trails and sitting unnecessarily on an advisor's desk. Always listen to your chosen advisors, but remember that as buyer and seller, its your collective deal, and you're the one's who will make or break it when the issues are cloudy and the timelines are dragging on.
  • Set a realistic time frame. Negotiating the deal, going through due diligence, getting advisor input, writing up the deal, and getting financing in place normally takes more time than first estimated.

If the change of control is time dependant due to the business sales cycle, year end, etc., then make sure you have sufficient time to get the deal done before you start, otherwise the only people that will be making any money will be the advisors when the deal can't get closed on time.

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