California Business Broker: Financing and Leveraging
As business brokers in Southern California we work with clients that are interested in buying a business or selling a business. This topic will have lessons for both buyers and sellers. The topic that I am referring to is the topic of "all cash" business sales. Every seller wants all cash, which is understandable. Yet, all cash deals are almost unheard of.
Why is this? All cash deals are rare because it makes more financial sense for buyers to leverage their money and use their cash funds as a down payment that to pay cash. In fact, in many cases it makes more sense to put as little down as possible. The buyer will still need cash for operating capital. (if it is an asset sale) Furthermore, in some cases, through leveraging, the buyer's return is highest when they put the least amount down.
This does not mean that the seller will not walk away with a large sum of money. If a SBA lender or a bank finances the deal then the owner will get a large check at closing. Sellers should consider carrying a note in order close the gap. A seller's willingness to carry a note may be enough to make the numbers work for a buyer.
Here are some examples to illustrate our point:
In this example we put ourselves in the shoes of a buyer who has $100,000 to invest. By looking at the graph we see that they can buy any one of these businesses. They could buy a business all cash or leverage their money to buy the larger business. The key figure to note is the net after debt service. The net after debt is almost three times as much for the largest business than for the all cash business. If you had $100,000 liquid funds to invest which business would you buy?
Another items to note is the fact that the owner of the largest business carried a note for $62,500. For our hypothetical scenario this makes the deal work for the buyer.
The same holds true for larger deals as well. A potential buyer with $250,000 to spend can put that money to work and acquire a much larger business than if they bought a business outright.
What is the lesson here for buyers? Many buyers who are seeking a business to own and operate look for businesses within a certain price range. If you are a buyer, my advice would be to not confine your search to a narrow price bracket. Keep your options open. As you can see above, the same funds available for a down payment can leveraged to buy businesses with very different selling prices. In addition, businesses often sell for very different prices than their listed price. Find a business that is a good fit for you and then do your homework. If the owner is willing to work with you then everyone can win.
What is the lesson for sellers? For the deal to move forward it must make financial sense for the buyer. You can aid in this process by working with the buyers and with their lenders. All cash deals are very rare - it simply does not make sense for a buyer.
Are you a business owner who could use the expertise of a business broker? Are you a buyer who would like to learn more about how to acquire a business opportunity? If you are in the Southern California area, we would like to speak with you. All inquiries are confidential.
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