By: Ken Lewellyn, CBI

A recent survey of members of the International Business Brokers Association (IBBA)
found that business intermediaries expect 2010 to be a busier year for buying and selling
businesses. Some of those transactions may need creative financing. With a busy year
ahead for small business transactions, there are a number of creative financing options to
consider.

1. - Seller Financing - Increasingly, buyers and lenders are looking to the seller for
financing as they try to put a transaction together. In such a scenario, the seller will hold
a note at an agreed upon interest rate for a specific term or amortization – generally
ranging from five to 10 years.

The terms of the sale may include a balloon payment three to five years after the purchase
date. It’s a way of giving the buyer time to get up and running and to establish a
successful track record with the business.

Seller financing makes the bank more comfortable with the transaction. Lenders know
they have a seller who has a vested interest in the success of the business rather than one
who will take their money and run.

2. - SBA Loans - In sales of a business, conventional loans usually aren’t available, so a
buyer may want to consider going to a Small Business Administration (SBA) lender,
which has a number of loan options.

The SBA guarantees a portion of the loan. The buyer pays an SBA loan fee that allows
them to get funding for a loan the bank couldn’t do conventionally. If an SBA
guaranteed loan goes into default, the SBA will pay the lending institution a set
percentage of any deficit left after liquidating the collateral.

3. - Earnouts - Earnout financing involves a certain dollar amount agreed on by the
buyer and seller to be paid to the seller based on the performance of the company after
the transaction is completed.

Earnouts can be structured in a variety of ways and can be based on different financial
benchmarks such as a company’s revenues, gross profits or net income.

Earnout financing is often used for companies that are in a turn around situation or when
buyers are purchasing on potential, rather than on historical cash flow.

4. - Mezzanine Financing - In mergers and acquisitions, mezzanine financing is another
alternative for a buyer looking for capital where the financing package may include
interest rates of 20 to 30 percent.

The lenders in this situation are typically high net worth individuals who are expecting a
larger return on their investment. They are lending in a junior lien or a position behind
the bank and seller financing. The loans are typically made with limited sources of
collateral, thus the request for higher interest rates.   Again, this financing is often used in funding goodwill or reputation in an acquisition.

5. - Funding Scenario - In a million dollar transaction, the buyer would be expected to
have a 20 percent down payment. The seller may hold an additional 10 to 20 percent in
seller financing, and the lending institution would offer a combination of conventional or
SBA financing to cover the difference, depending on collateral available.

A buyer and the lending institution must evaluate a company’s cash flow and determine if
it is adequate to cover their debt service and provide a reasonable return on their
investment. Lending institutions will also be examining whether a buyer’s coverage
ratio, or excess cash flow after all debt is paid, is adequate to cover their needs.
Even if you’ve been affected by a downtown in the economy in some parts of the
country, don’t let that stop you from considering your acquisition options. Creative
financing tactics are becoming more common.

Talk with a business intermediary representing the company you are considering
purchasing. They’ll know if the owner is willing to consider seller financing, earnouts or
other creative financing ideas. Based on your available capital, the business broker
should be able to tell you whether you’ll be considered for the purchase and may also
provide you references to various lenders that are familiar with financing the purchase of
a business.

Tennessee Business Services serves small business owners by offering services such as bookkeeping, taxes, IRS representation, business valuations, business turnaround consulting, sale of businesses and franchise advising.  Lewellyn is one of six business brokers in Tennessee to hold the Certified Business Intermediary designation, awarded  by the International Business Brokers Association.  Tennessee Business Services is located in Hendersonville, TN and can be reached at www.tnbizserv.com,  info@tnbizserv.com, or (615) 400-2150. 

The International Business Brokers Association is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.