Nuella had excellent credit along with the downpayment required to purchase the retail luggage store she wanted. But it appeared she would be short nearly $50,000 in the working capital she needed to take over. And the credit crunch with the subsequent real estate decline put an unhappy end to her plans to borrow on her home equity for that purpose.
The broker saved the deal with some ideas about getting vendors to help with the financing.
First, the seller agreed to accept a promissory note in lieu of the cash he was supposed to receive for the inventory at close of escrow. Then, two of the suppliers, after meeting with Nuella and examining her solid credit report, said they would be willing to continue supplying merchandise to the store provided the new owner would pay one third of the invoiced amounts upon delivery, and then make regular payments so that no item would go unpaid for more than 90 days.
Thus supplied with the goods she needed, Nuella was able to generate income from the first day she took over the company, and soon had fully paid the obligations, was building a working capital fund and collecting a profit.
EQUIPMENT SUPPLIER HELPS
The vendor who assisted Isaac in completing his purchase of a yogurt business was the supplier of the freezers and yogurt maker that Isaac leased, and had installed when he took over the company. The vendor was motivated by the chance to have a retail showcase for his new models and was reassured to receive--instead of a deposit or downpayment--a security interest in the equipment at Isaac’s pizza restaurant down the street. Meanwhile, the cost of installing the new machinery was borne by Isaac’s brother-in-law, an engineering contractor who was granted a minority interest in the yogurt business. The existing equipment, incidentally, had been pledged by Isaac to a used fixtures dealer in order raise the money needed for the downpayment on the business.
A complicated transaction, indeed. But the seller agreed because he got some cash up front and a note from the buyer. And the escrow holder--after coaching from Isaac’s accountant--was able to figure it out so the paperwork could be completed and the transaction closed to
everyone’s satisfaction.
OPPORTUNITIES FOR FINANCING CREATIVITY
With media attention directed at celebrity dealmakers and leveraged buyout artists on Wall Street, it’s encouraging to know that there are opportunities for creativity involving small business transactions throughout California.
Experienced business brokers know that many companies providing products and services to a business that is being sold are willing to ”work with” the new owner in order to keep him, or her as a customer. The “work with” process may involve granting credit to the new owner for products and services to be provided after close of escrow. That gives the buyer--perhaps someone with limited working capital--an opportunity to start generating some cash before the payments come due.
Vendor cooperation can also be in the form of an agreement that payments still due from the seller can be made, over time, by the buyer, instead. Standard escrow closing procedure calls for all debts incurred by the seller to be paid off, so the business can be transferred free and clear to the buyer. A buyer who takes a business “subject to” various obligations that still are due to the seller’s creditors, is effectively using the vendors to help finance the transaction. It should be noted that this only works if the vendors are in agreement with the plan.
A variation on these approaches involves soliciting a company that would like to sell to the newly acquired business. As incentive to get the business of the company being sold, the supplier may be willing to extend credit to the new owner.
And a vendor who is not in a position to extend credit to a new business owner, may be able to prevail on the bank he does business with, to step in and help fund the transaction.
Prospective buyers, frustrated by the mortgage meltdown and increasing difficulty in obtaining SBA loans, might be able “create” needed financing using the company’s suppliers.
See all contributions from Peter Siegel
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