I am frequently asked, especially by people from the real estate field, “How do you buy a company, finance all of the assets with a first lean to the asset-based lender and still secure the note to the seller in the case of default… and make him feel OK with the whole process?”
That is an excellent question. There are many answers that are provided in our program and I’ll share one of them with you here. You should also know that we will teach you 113 other financial leverage techniques to acquire a company that do not require the seller to incur any risk exposure in the transaction at all making this question totally moot.
If you use the technique mentioned above, versus one of the other 113 you will learn, you need to first build what I call a “Cosmic Bond” with the seller. Unlike real estate, business owners have a strong attachment to their business established during the time they were making great sacrifices to build it. The “Cosmic Bond” is built over a month or so during the negotiation process where the seller comes to see you as the person he wants to take over the upbringing of “his child” that he has nurtured from inception, through infancy to its current state of maturity. Also, unlike real estate, a business has little liquidity in the marketplace at sale time (76% of all retiring business owners close their business because a qualified buyer cannot be found). When taken together these two sets of circumstance create flexibility on the part of the seller not found in a real estate transaction.
While you will be giving the first lien on assets to your asset-based lender, you will be giving a second lien on the assets to the seller. You will also pledge, as security for the seller financed loan, all of the shares of stock of the company he is selling you. If you have not instilled confidence in the seller that you can successfully manage his business, he may not be responsive. But, if you have instilled such confidence during the negotiation stage, the odds are he will.
To make sense of this transaction, you will need to take your real estate hat off, and put your business hat on. In real estate, the property has a market value and, if the seller doesn’t sell to you, he will sell it at or near the market price eventually to someone else. Not so in a business purchase. Qualified business buyers (with the capacity to manage the business) are few and far between. The few that there are, generally do not have buckets of cash sitting around waiting to buy the company or even put a large amount down. If the owner doesn’t sell to you, he may end up selling to someone else for the same terms you are suggesting, or… for worse terms and a lower price from someone not as qualified to manage the business as you, or… like 76% of retiring owners, he may have to close the business for its liquidation proceeds.
Ironically, the trend is toward an ever increasing number of closures for liquidation proceeds. This is due to the vast number of “Baby Boomer” business owners who are now reaching retirement age versus the smaller number of buyers available from the generation behind them. The wave of Boomers retiring and putting their businesses up for sale is just now beginning to serge and won’t crest for the next ten or so years. So, qualified buyers are in the driver’s seat especially if they understand the metrics of business buying.
Please join me on The Big Pitch on Biz Talk Radio Monday – Friday 3pm ET/Noon PT as we discuss topics like this and many others to help entrepreneurs like yourself with common challenges in today’s business world. The following link will take you directly to the internet player, so just click the link and you are ready to go.