Vendor Take Back
A "vendor take back" is a non-cash instrument, usually a note, accepted by the sellers of a company as part payment for the sale of their business.
Many business owners we meet react with horror at the prospect of holding "paper" and waiting for those monthly payments to come in. A typical reaction is "When the business is sold, I want nothing more to do with it. When it is over, it's over. I want to get on with my life, smell the flowers, lay in the sun and not worry about collecting monthly payments." Others say, "What happens if the new owner ruins the business, doesn't pay the note and I have to take back what is left and try to sell or run it again?"
To be sure, there are legitimate concerns that should be carefully addressed by business owners when planning to sell their businesses.
As business brokerage specialists who have managed the sale of over 600 businesses, we have seen almost every conceivable financing scenario in our successful sales as well as in the businesses we were unable to sell. Our observations, as well as the reality of the marketplace may help those owners who have concerns about financing a part of the sale of their company.
There is an old saying, "You name the price and I'll name the terms" which suggests elements of a vendor financed deal. Here are some points to consider:
The lowest price that any business will ever command is an all cash price. This is as true for the multi million dollar deals done by investment bankers as it is for small and mid-size businesses.
According to studies presented to the International Business Brokers Association, all cash transactions are usually discounted by 25% or more of the "fair market value" or asking price.
What is your risk if you finance 30% of a full price sale?
The higher the initial equity down payment required, the smaller the number of potential buyers available. Think of the shape of a pyramid. At the base, assume no down payment. That will produce an almost infinite number of buyers. The top of the pyramid assumes an all cash deal and will be accessible to the smallest number of buyers.
It is an axiom in business brokerage that a buyer with $10,000 in cash will want a company worth $100,000. A buyer with $100,000 is looking for a business worth $500,000.
A good profitable business will usually have a high goodwill component in the price. Goodwill cannot be financed by conventional money sources.
One of the best investments you may ever make is to finance a part of your business sale. Think about it. You will be investing in a business which you know better than any other in the world. You can frequently obtain a higher than normal rate of return. You just as frequently can have better than average security for your note. As well, the principal portion of the note payments could be tax free or taxed at a lower capital gains rate.
The fact that you finance a part of the sale sends a strong message to a buyer. He knows that you have confidence in the business and that you are not hiding some bad news.
There are many other issues which have to be taken into consideration in your decision to finance part of your sale. The first and most important is the buyer. Is it a person you like and can relate to? Is the purchaser's equity hard earned money or an inheritance? Does the person have the experience, education, energy and other qualifications to run the business? If the answer to these questions are positive, you should be comfortable with your "investment".
Security for a note is always a concern. Most buyers will be unable to provide personal guarantees if their banker requires them to finance their portion of the deal. If it's an asset sale, a second charge on the assets is usually available. If it's a share sale, the shares are normally pledged and lodged with your lawyer and not released until the note is paid in full.
Information on the progress of the business is available to the seller by receiving monthly financial statements. You can have clauses in your agreement which will prohibit a new owner from doing certain things which will overextend the business.
There are many ways to make your investment in your old business both safe and sound and they can be summed up very briefly. Sell your business to the right buyer at the right price and on the right terms. The post sale failure rate of businesses sold using those principles is almost nil. That means your investment is safe and you will be paid.
Financing a good portion of your business sale means you will sell it faster and at the best possible price.
M&A Canada Inc. manage mergers, acquisitions and the brokerage of privately held companies. The company is based in Halifax Nova Scotia and has affiliate relationship across Canada and throughout New England.