Vendor Finance in the Purchase of a Company
Did you know the owner of the company 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 company’s own shares are a guarantee in the event of default. That is, that the owner recovers the ownership of the company in case you, as a buyer, do not comply with your payment obligations. He knows the true value of his company and knows how to manage it properly. Thus, if such instance should to occur, he should not have much trouble if the property is reverted. He knows the company perfectly well and believes in it, so he should not attribute the risks that he would assign, due to ignorance, to a stranger.
If, however, you want to give the shares of the company 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 company 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 company 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 euros.
In addition, the value of the company 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 company for a while
What If the Businessman Resists a Structure of Deferred Payments (Vendor Finance)?
Initially, it is likely that the business owner will resist a structure of deferred payments (vendor finance) 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 until he agrees.
If he resists completely, you should ask yourself questions like « Is the owner hiding something that you do not know? Will the company not be able to pay? or did he not tell you it was a cash generator? »
Maybe the seller has valued his company at 10 million euros and you explained that, since he has 7 million between bank loans and lines of credit, the value of his shares is 3 million. So, you find that the seller wants the 3 million, but you do not have the money. Since he wants to sell and can not find another buyer, you offer the possibility of buying it in several deferred payments.
You have already studied the company and know that it generates 2 million euros of EBITDA (profit before interest, taxes, amortizations and depreciations). The financing that the company already has pays an average interest of 7.15%, so you will have to allocate from the EBITDA 500,000 euros to pay the banks. You only have 1,500,000 euros available per year to generate dividends and pay them back.
Given the situation you are in you can propose the following structure: I am willing to pay you 500,000 euros cash, another 500,000 at the end of the first year and one million euros a year for the next two years. Remember that you must reserve money to finance the growth. Think that now, the company is yours.
Within a more globalized world, the buying and selling of companies 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 maximize our value. If you are considering buying a company and are looking for advice, do not hesitate to contact us!