Financing and Making Offers Flashcards
What different kinds of financing can you arrange when you buy a business?
Bank debt, asset loans, vendor financing, equity financing, grants, leasing company (buys the company’s equipment and leases them back to you), royalties, earn-outs, assume liabilities, credit card(for inventory)
What is the highest level of debt banks generally want to see relative to the owner’s investment?
3:1
Why is vendor(seller) financing critical to protecting the buyer’s interest?
The vendor must be exposed to risk to reduce the buyer’s risk. This protects the buyer if the seller doesn’t disclose the company’s debts and judgments honestly. Require a clause that allows the buyer to offset any unexpected material expenses from the seller’s note. This aligns the interests of the buyer and the seller.
If the seller isn’t willing to finance a portion of the transaction, they either don’t believe you have what it takes to run the business, or they know something is wrong with the business.
Why can’t deals happen without vendor/seller financing?
Most of the time, you won’t be able to get all the money for the business. And it is a sign of bad faith on the seller’s part.
What are the important things to remember about submitting offers and LOIs?
- Never use a Binding contract.
- Always make offers subject to further diligence.
- Always make offers subject to an outside determination of value.
- Never agree to use a real estate contract to buy a business.
- Do you need to use a lawyer to create a non-binding offer? No.
How can we get equipment and let it pay for itself over their useful life?
Operating lease - Often, businesses will use this
type of lease when they want to have access to
equipment that needs to be renewed every few years.
You’re not obligated to purchase the equipment at
the end of the contract (although you may have the
option to do so.)
Capital lease - This is debt in disguise, and it must appear on your balance sheet. The nice thing about these leases is that the equipment is the collateral for the debt.
What is net normal working capital?
The normal level of working capital is the amount define in the purchase agreement and referred to as a net working capital target, a networking capital peg or networking capital true up.
This only works for share sales. We’ll usually say this business comes with a net current account balance of a certain amont.
Net current account balance = cash, inventory, and other short term assets minus the current liabilities.
With respect to operating capital, what’s important to remember when doing an asset sale?
Make an adjustment for operating capital. This looks like simply deducting the net current operating capital from the purchase price.
