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Business acquisition financing “challenges and solutions”

June 8, 2012

One of my clients wants to acquire a business.  This business is not in operation yet.  The seller was under-capitalized and could not finish his project.  The seller did not have enough capital to complete construction and get needed equipment to run the project.

My client is trying to purchase this company because of the unique opportunity and the great potential this company holds in the near and distant future.  There are many benefits once this company starts operation.  Here are some of the benefits.
1.  It will create many new jobs.
2.  It will help reduce state dependency on importing this unique needed product.
3.  It will help increase tax revenue for the state.
4.  The upside financial reward will make a difference and  impact the buyer significantly.

When analyzing a business opportunity for financing reasons like this one I usually look at the following important issues first:
1.  The collateral base of  the loan.  We want to make sure we have enough collateral to liquidate the assets in case of a default.  In another word we want to make sure the lender is secured.  So, lender’s risk is very minimal.  Therefore the loan will have greater chance of getting funded.
2.  The cash flow.  When analyzing the cash flow, we want to make sure we have enough income to service the debt, pay employees including owners, pay taxes and operating expense, grow the company, and still have money left for emergencies and other things.
3.  The management.  Owners and key management personals must demonstrate that they have the ability, willingness, and necessary experience to run this company successfully.

In general if the borrower posses the above three items then most of other challenges will be much easier to deal with.

In most cases of business acquisitions the lender wants the borrower to participate and place a minimum of 20% to 30% capital injection/ down payment in to the transaction.

In this case the borrower has great opportunity but not enough down payment and limited time to find solution(s) to complete this transaction or this opportunity will be gone.

One of the easiest solutions is to find a partner or an investor who can participate in the down payment to satisfy the lender’s requirement.

Other possible solution that might work is to bring in another company as a partner in related industry.  This possible company must demonstrate that it has strong financials, good management team with necessary experience in running business successfully.

There are also other solutions but not applicable in this case at this time.  One solution is to have the seller carry a note.  Some lenders will not allow seller carry back.  If the lender allowed seller carry back, then may not allow the note to be larger than the borrower’s capital injection/ down payment.  Lender also may not allow interest and principle payment to the seller’s note holder.  Lender may only allow interest payment toward seller’s note.  In general this note can reduce the lender’s risk in the transaction.  It can also provides some peace of mind if something goes wrong in the business the seller may help the new management overcome some of these challenges since the seller has interest in the business.

There are few deficiencies in this transaction.  A lot of borrowers will face these common or other deficiencies in business financial transaction.  However, if the borrower does not give up, continue to work on finding solutions, be creative and have an open mind, ability to work with others, maybe give up some control, then we might have chance to get this deal or similar challenged deal funded.

We usually offer these types of services:
– Working capital
– Medical capital
– Quick closing for small business bridge loan
– Business loans for acquisitions and expansion
– Government guaranteed business loans through SBA, USDA(B&I), and other governmental agencies
– Business credit cards
– Assets based loans against properties, equipment, vehicles, inventory, accounts receivables, and other business assets
– Hard money loans
– Equipment leasing and financing
– Consolidation of business debt
– Purchase order financing
– Factoring

I would appreciate all your comments and you are welcome to contact me with any questions you have at risingbirdinc.com

Ali Neesaneh
ali@risingbirdinc.com

http://www.risingbirdinc.com

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