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Using Vendor Financing For Business Purchases


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.

About The Author - Peter Siegel is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 866-270-6278.


Categories: BizBen Blog Contributor, Business Purchase Financing, Deal And Escrow Issues, Small Business Financing



  Helpful Resources To Assist In Selling And Buying California Businesses
Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Ranvir S. Sandhu, Esq. - Legal Services For Buyers And Sellers

I've worked at top Bay Area law firms and have extensive experience with business entity formation, mergers, dissolutions, conversions, employment matters, including experience in reviewing and negotiating transactional documents such as leases and purchase agreements.

Joe Sandbank, Esq. - Legal Services

I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.


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