A recent survey of members of the International Business Brokers Association (IBBA)

found that business intermediaries expect 2008 to be a busy 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.

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.

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 up to 75

percent of any deficit left after liquidating the collateral.

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.

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.

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.