Many companies and individuals are well equipped and prepared to make and acquisition and continue the company’s growth, profitability, and competitive edge; however, not very many of these acquirers are holding enough cash to make all cash acquisitions. So how are they expected to finance a transaction without the cash to do so? The answer is rather simple; they get it from someone who does. Or, they convince the sellers to take some equity or a buyout note. Or, they have some sort of a combination of the two. Let us discuss the latter.
In a situation when the owner is making a multi-million dollar acquisition it is important for that individual to put up some cash to show that there is some skin in the game. He or she may receive the cash from private investors or from his or her own savings account. This shows that there is commitment and a need for the business to succeed after the deal is completed. He or she may then be able to negotiate some sort of buyout where the seller will receive cash payments over the next 12 to 24 months till the remaining equity is sold out. On these terms, the bank will see the equity held by the buyer and the seller on the closing date and may be willing to finance the remaining portion of the deal.
By negotiating a leveraged buyout and utilizing bank financing, the buyer is able to spread the risk implemented into the deal and join all parties together in the pursuit of the business’s continued success. This strategy will also show the seller’s faith in the going concern of the business, if there are any pending litigations or liabilities that were not discovered during the due diligence process then the seller would be less likely to hold equity and participate in a leverage buyout.
For more advise on how to obtain SBA bank loans or how to buy or sell a business, contact our Seattle business brokers.