Did you know the owner of the BUSINESS that you want to buy can finance the operation…
Yes, it is not a hoax, it is a form of financing known as vendor finance. Undoubtedly, this is the best type of financing to buy a company. Let’s discover what it is about…
How to Get the Seller to Finance Your Purchase
Once you have found the best business to buy, understanding the needs of the seller is key to create more possibilities to be able to structure an agreement that fits both. When there are liquidity crisis environments, sellers find that if they want to sell their companies they should help by facilitating financing, that is, allowing part of the payment to be paid through deferred payments.
You should think that the seller is the one that is most interested in the operation being done and the one that should have more faith in the creation of value capabilities of your company.
In a financing agreement with the seller, in which he accepts deferred payments, it is going to be easier than agreeing with the bank that the business’s own shares are a guarantee in the event of default. That is, that the owner recovers the ownership of the business in case you, as a buyer, do not comply with your payment obligations. They knows the true value of their business and knows how to manage it properly. Thus, if such instance should to occur, the seller should not have much trouble if the business and/or property is reverted. The seller knows the business perfectly well and believes in it, so they should not attribute the risks that they would assign, due to ignorance, to a stranger.
If, however, you want to give the shares of the business to a bank as collateral for a loan you will find that option inconvenient. Banks are not seduced by the idea of having to manage a business and, not knowing it, they apply a much higher risk rate than that assigned by their previous owner.
With Vendor Finance There Is No Fight for Interests
Another very interesting feature of the vendor finance is that the seller usually does not fight interest on deferred payments, unlike any other lender. Their concern is focused on selling the business and its price, not interest. This can be very significant in the true final price of the operation. For example, if instead of paying 5 million cash you pay 1 million a year for 5 years without interest – considering an interest rate of 8% – you would actually be paying $3,992,000.
In addition, the value of the business is still in it and not yet in the seller’s pocket, so it should not be difficult to assume that part of the value remains within the business for a while
What If the Businessman Resists a Structure of Deferred Payments?
Initially, it is likely that the business owner will resist a structure of deferred payments since it is not what he had in mind when he decided to sell his company. Your challenge, as a buyer, is to persevere with the approach helping them to fully understand fully the ‘what, how and why’ this will actually benefit them as an with their succession plan.
Within a more globalised world, the buying and selling of business is a great way to approach a new market or reinforce a competitive position. The main difficulty involved in this type of operations is knowing how to approach them so as not to be deceived and maximise your value. If you are considering selling or buying a business and are looking for advice, do not hesitate to contact us..