How will the Buyer pay for your Company?
Chris Covington is a business attorney, with significant experience in mergers and acquisitions in his prior positions as a partner in a mid-size law firm, a Senior Vice President, General Counsel and Secretary of two public companies, and an investment banker. He recently returned to private practice, and has a blog (bizsalelaw.com) which focuses on the concerns of selling founders and executives. Chris often advises MergerTech clients.
Understanding how your potential Buyer is going to finance the purchase price for your company may help you maximize the purchase price. Here is an Inc. article that focuses on current trends in acquisitions financings.
My view of the key “take-aways” for Sellers:
- The credit crunch has made financing more difficult. That means that if you want to minimize the impact on your purchase price, you may be required to consider a number of alternatives. (And always keep in mind that how you are going to be paid – meaning the time period, what guarantees or security is being provided, etc. – can end up being as important as the purchase price itself.)
- Unsecured loans are being made less frequently, and asset-based lending is of growing importance. The key “assets” for a service business are typically inventory and accounts receivable; other businesses may have equipment and other fixed assets that can also be used as collateral. Accordingly, insure that you are managing both your inventory and accounts receivable aggressively. That means disposing of out-of-date inventory, and aggressively monitoring and pursuing your accounts receivable. (In many industries, for example, AR 90 days past due may not be “eligible,” or may be of little value in your collateral calculation.)
- Seller financing is of particular importance for smaller transactions. Be prepared to consider financing a portion of the purchase price (and, of course, an “earn-out” provision is, in effect, your financing of the purchase price). And make sure that you do everything possible to “secure” your position. Particularly if you are a founder / owner, you probably have little interest in re-possessing your company assets, but the threat of taking that action is often the key to getting paid. And always ask for interim financial data, so that you can anticipate any default. (Also note that it is likely that your position will be required to be subordinated to other lenders, particularly any asset based lender.)
- Private equity financing remains a possibility, but several cautions are warranted:
- PE firms are typically looking for >$10 Million in revenue and $2M in earnings (much below that and there is simply not enough up-side). Accordingly, if you are significantly smaller you are probably not a candidate.
- PE firms will typically insist on “control” but generally will not acquire the entire company. That means that you may be required to maintain a minority interest and continue to manage the company for a few years, and that, in turn, can be a tremendous opportunity for you. PE firms typically expect to “exit” within three to seven years (although I have seen less than two years, and more than ten), and look for a double-digit rate of return. Your “second sale” therefore – when you exit along with the PE firm – can result in a sales price that is in fact a multiple of your initial sales price.
I would also note that early in the negotiating process Buyers are often reluctant to be candid about their financing sources or concerns, and addressing the issue should be done delicately. Very often it is an issue that is best addressed by your investment banker, broker or your attorney, but in any event, don’t ignore the issue. Particularly if you are asked to sign a “no-shop” or similar agreement, you do not want to take your company off the market only to later find out that the sale is contingent on a financing that is in fact unlikely.