Vendor Financing Strategy Can Be
Critical To The Success Of Your Business Acquisition

A Vendor Financing Strategy is nothing new when it comes to the business financing of a business acquisition

In fact what doesn't tend to get old is the seller's unwillingness to provide any sort of vendor financing from the outset of the deal negotiations with potential buyers which tends to be highly un-strategic in many cases, especially if the deal can't get done without vendor financial support.

Click Here To Speak Directly To Me About Business Acquisition Financing.

From the vendor or sellers point of view, there is the obvious reasons not to finance and that primarily being to get all the cash out of the business and not be exposed to the risk of the business being unable to repay a the full vendor loan in future.

The Reality, however, is that there are very few cash sales for acquisitions which means that some amount of financing is required.  And from a debt lenders point of view, business acquisition based lending is the second least favorable form of lending after start ups due to the higher failure rates compared with other forms of financing.

To take it one step further, business financing sources like banks, trust companies, credit unions, private capital funds, etc., tend not to approve any acquisition financing if the vendor does not contribute some amount of funding, especially if there is any goodwill involved in the sale price. By requiring the vendor to have "skin in the game", the lender expects the vendor to play a more significant role in the successful transition of the business to the new owner(s) as well as the ongoing business support until such time as the vendor loan is fully repaid.

Debt lenders can also have very specific rules and criteria that can make qualifying for acquisition financing difficult to say the least.  On the one side, the lender box so to speak can be very specific and rigid while on the other side, virtually every business acquisition has its own unique characteristics that require more of a customized solution.

So what's the answer to this dilemma?

A more robust vendor financing strategy.

And by being strategic, I mean that the vendor has to gain some understanding that he or she holds the power to getting the deal completed if they are prepared to provide a certain level of customization to the overall financing required.

Put another way, if a lender is prepared to provide x,y, and z, but requires a,b,& c in some form, then it's up to the vendor to work with the buyer to try and customize a vendor financing strategy that aligns with the lender requirements.

Why should the vendor be the one to customize their financing?

Because its their deal.  Lenders don't customize very often if at all.  Their box is their box, and straying too far from it can be disastrous as can be illustrated every time there is a recession and hundreds of banks go under, largely for having business models that were too aggressive and overly dependent on the economy operating smoothly on all cylinders.

Unfortunately, in practice, the opposite of what I propose tends to be true more often than not. 

It all starts with the negotiating process between buyer and seller. If an agreement in principal can be reached, the vendor will spell out their "lending box" in terms of any vendor financing that may be available and it's left up to the buyer to find the lender who will adapt to the unique vendor financing strategy

Good Luck with that one.

I'm not saying that the vendor should take unnecessary risks or provide whatever is required to make the deal work. 

No, not in the least. 

What I'm trying to say is that the objective is to close the deal.  If financing is required, there will need to be funds advanced by a third party.  If there are any gaps to what the third party or parties are prepared to approve and advance, then its left to the buy and vendor to figure out how to fill that hole.  If some customization can be done to a vendor financing piece that is congruent with the needs and requirements of a third party lender, then the deal can get done.

Unfortunately, when all the stars do align in acquisition deals, it's almost by accident in that the rigid requirements of the lender and the rigid requirements of the vendor just happen to add up and make the deal work.

Therein lies an enormous opportunity for the 1,000,000's of businesses (yes millions) that need to change hands in the next decade or so as baby boomers all over the world try to cash out and enjoy their retirement.

With a little bit of self education into the challenges of business financing, and some creativity as to what they can offer in the form of financing, vendors can greatly increase both probability of selling their businesses and getting the price their after through a more proactive vendor financing strategy.

To speak to me directly about vendor financing strategy, click here.

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