Seller Financing Pays
Oct 23rd, 2009 | By admin | Category: FinancingAcquisitions, which were financed by the seller, sold for a 15% (median) higher price than all-cash transactions. The average down payment was 37%. This difference is more pronounced if we compare the all-cash transaction to those selling with seller financing of 70% or more. In these deals, the median sale price was 27% higher price than all-cash transactions. “Transaction Patterns,” by Toby Tatum
Interesting statistics.
One question that inevitably comes up when someone is beginning to contemplate a business acquisition, is “what size business can I buy?”
This is a very important question that needs to be addressed before you even begin the process. As a buyer you will want to be careful not to over-leverage nor under-leverage your business acquisition. This is a financial question which takes into consideration risk vs. reward. One rule of thumb that I tell my clients is that they should have, in liquid assets, at least 1-2x the pre-tax profit. This is of course dependent on many variables, some of which include price that is ultimately agreed upon, the amount of owner financing, the credibility of the buyer, the collateral of the buyer, the salary the buyer wishes to receive, etc.
The moral of the story is that It is important to keep the end in mind when starting the buying process, otherwise you could end up spinning your wheels or having a deal fall apart at the last minute because of lack of financing.
I am interested in learning which business credit reporting agencies are most often utilized by potential lenders, vendors, landlords,etc, and how to manipulate my previous business credit data into the most appealing form.
It seems that some companies do not report to some agencies, and some information never makes it to the proper place.
How best to traverse this minefield of business credit?
Sorry if this is the wrong place for this question–I didn’t know how to start a thread.
This is one of the first creative financing deals we did, during in the 1990s.
The company is a very old moving and storage business that generates $150,000 annual profit.
The buyer did not have enough cash to meet the seller’s demand for the down payment.
While analyzing the company’s financial statements, the expense category, Maintenance of Vehicles, caught our attention.
The company owned 8 trucks. The average age of the fleet was 9 years old. Most of the trucks had been fully depreciated, so there was no write-off against income.
Two mechanics worked full-time maintaining and repairing the trucks. Their payroll, benefits and employment taxes amounted to $80,000 per year.
Nearly 3,000 square feet of the company’s warehouse was devoted to the repair shop. The rent on this space was about $15,000 per year.
$10,000 in spare parts was on hand, because when a truck breaks down there is no time to try to find parts; customers demand on-time delivery.
Unfortunately, sometimes the trucks were not fixed in time and the company suffered late-delivery penalties. These costs ran about $5,000 per year.
Here’s how we structured the deal:
First, we saw the wasted cash flow
• $80,000 for wages, $15,000 for rent
• $10,000 in spare parts, and nearly
• $10,000 per year for parts and subcontracted labor
This amounted to $115,000.
So we:
• Sold all the trucks and used the proceeds for a delayed down payment
• Laid off the mechanics
• Returned the spare parts to the supplier and got a refund
• Avoided $5,000 a year in late delivery penalties
• Freed up 3000 square feet of wasted space to create revenue-producing space. This enabled us to earn $10,000 each year from customers’ to store their goods. After all, we were in the moving & storage business
We increased cash flow $125,000 per year! That is about $11,000 per month!
We then leased brand new trucks, which came with a maintenance contract, for $8,000 per month.
Subtract $8,000 for the lease payment on the trucks from the $11,000 cash flow we created—
and we were ahead $3,000 every month.
$36,000 every year! $250,000 in 7 years!
The buyer of this business was very happy! He got more profit than he expected. The business could afford to make larger installment payments to the seller to pay off the business sooner.
This was a win-win deal. People who KNOW how do these deals every day!
Wow, I love what you guys did for that moving and storage company. That’s amazing. I imagine there are tons of business out there right now that with just a little bit of restructuring could be really pulling it in with you. I think when the same people have run a business a certain way for years they get stuck with their routine. Oftentimes a fresh perspective and looking at things a different way can produce staggering results.
We all fear change. However the only constant is change.
‘People who KNOW how do these deals everyday.’ Very nicely done. So what do I/we need to do to KNOW
how to do these deals everyday?
It would be interesting to know the effect the present economy is having on doing these deals.
How have you shifted your tactics to adapt to the banking crisis? Any additional due diligence required due to the extra stress placed on the sellers?
When looking to finance the purchase of a business at a leased location, look into the possibility of buying the building where the business is located. There are lenders that provide 100% financing for purchasing the building if you run your business from there. Revenue from other businesses leasing within the building can supplement or cover the cost of financing and will add to your bottom line. Existing building management and maintenance can also be retained.
Beware of the self professed finance companies like Remmington Financial in Col. they will promise you anything and deliver you nothing and require all sorts of fees up front.
Beware of the many ” professional financial” company’s out there that require all sorts of up front fees and charges like Remmington Financail in Col. they are really “professional Scam” artists.
What is a normal down payment?
Let’s put the facts where they belong, which is what the typical seller expects — not what the buyer wants.
Most business buyers want to know what’s a normal down payment.
As a Business Buyer Advocate ®, I always ask:
How much money do you have to put down to buy a business?
And then I say to the potential buyer:
Most sellers won’t accept a down payment less than one to three times the first-year salary plus pretax net business profit you expect from a business.
If you don’t have that amount of money to invest, and assuming you can find a seller that will accept what you offer, you’ll pay top dollar for the business if it is a mature, profitable business for sale.
Would you like a useful tip on this?
The larger the down payment, the lower the price.
Our Authorized Business Buyer Advocates show buyers creative financing so buyers minimize the cash from their pocket for the down payment, yet (sometimes) the seller can get a huge down payment. In business, you use either your money or other people’s money. 500 of our creative financing ideas are in our book: “How to Get ALL the Money You Want for Your Business without Stealing It.” Link for the book: http://www.partneroncall.com/PDF/BookOrderForm-CreditCardAuthorization.doc
Money is still tight out there and unconventional creative financing is the way around some of these lender demands
Interesting…. Not sure if we can believe it all but interesting….
http://www.sba.gov/idc/groups/public/documents/sba_homepage/sba_rcvry_factsheet_cre_refi.pdf