Third Party Services, Part 1: Banks for Business Acquisitions

What Third-Party Services Are Important When You Want to Sell Business?

When you’re ready to sell your business, you will need to engage in a number of third-party services. Even if the buyer has cash-in-hand to buy the business, you both still need a variety of support services.

Just what third parties should you engage when arranging the sale of your business? Here’s a short list:

• Business broker
• CPA
• Attorney
• Bank or other lender

While all of these services are important, finding an appropriate source of funds for the buyer is perhaps the most essential. Close to 90% of all business buyers use loans to leverage the purchase. Even if the buyer has cash on hand, they often want to keep that money for other purposes. If, like most buyers, they don’t have that much cash on hand, they need to get a loan. That’s why banks are essential to completing most business purchases.

What Ways Can a Buyer Fund a Business Acquisition?>

When a buyer and seller come to an agreement for purchasing the seller’s business, coming to the final number isn’t the final step in the process. The buyer needs to arrange financing for the purchase, and there are six common ways to proceed.

Personal Funds

If the buyer has the cash on hand to finance the business purchase, this may be the most cost-effective way to go. By using personal funds, the buyer does not incur interest or long-term debt. It is, however, only recommended if the buyer has the actual cash. If the buyer has to mortgage other property or max out his credit cards to get the debt, it’s not really financing from personal funds and could end up being more costly than other forms of financing.

Seller Financing

If the buyer can’t self-finance a business purchase, perhaps you, the seller, can. In this arrangement the seller of the business essentially handles the mortgage for the purchase instead of the buyer using a traditional financial institution. Seller financing isn’t always feasible, as not all sellers are willing to handle the financing of their own business’ sale. If this is the preferred approach, though, there are a large number of do’s and don’ts that you, as the seller need to be aware of.

For example, you need to assess the risks involved with assuming the loan. The interest on the loan should be at a competitive interest rate. And you should require a relatively hefty down payment of 15% or more to minimize your risk.

Because everything is handled between the two parties without any third-party involvement, this type of arrangement can facilitate a relatively fast purchase. Make sure you engage the services of professionals to make sure that the process goes smoothly.

Assumption of Debt

Another way to finance a business purchase is, instead of paying for the business outright, to simply assume the business’ debt. With this approach the remaining balance of the company’s outstanding loans is subtracted from the total cost of the purchase. If the assumed debt is high enough, the actual cash required for the purchase is minimal. This approach is only viable, however, if the company’s creditors allow the transfer of debt and if those debts are not in themselves financially overwhelming.

Leveraged Buyout

Leveraged buyouts (LBOs) are typically used to finance the purchase of larger businesses. In this arrangement the assets of the acquired company are used as collateral for the buyer to obtain a loan for the purchase. Most of the acquisition cost is paid for by the company’s debt, which maximizes the buyer’s return while requiring a minimal amount of equity financing. Unfortunately, LBOs tend to saddle the newly-acquired company with substantial, sometimes unsustainable, amounts of debt. This type of arrangement is typically used by private equity firms, not individual buyers.

Bank Loan

Finally, we come to the most common approach to financing a business acquisition, the bank loan. Loans can be from conventional commercial banks or from smaller boutique banks that specialize in small business investments.

Many buyers obtain bank loans through the Small Business Administration (SBA), which connects small busines speople and entrepreneurs with banks and other lenders. Because the SBA provides guarantees to those lenders, issuing an SBA loan for a business acquisition is viewed as less risky than similar direct loans, and are often easier for the buyer to obtain. There is, of course, a certain degree of paperwork and due diligence required to obtain any bank loans, including and especially SBA loans. SBA loans can be administered by both traditional and small boutique banks.

What Are the Best Types of Banks for Acquisitions?

Of all these approaches for financing a business purchase, obtaining a bank loan is the most common. When considering obtaining a loan of this type, the buyer can choose from two basic types of banks – a traditional retail bank or a boutique investment bank. For most buyers, the boutique bank is the better choice.

Retail Banks

Most traditional retail banks, such as Bank of America, Chase, or Wells Fargo, offer small business loans either directly or though the SBA. Many local branches of these national banks provide small business specialists to handle not just business banking but also loans of this and other types.

Know, however, that this type of lending is not their forte. A large bank’s processes are slow and deliberate and not always sympathetic to small businesspeople. Business buyers are often better served steering away from these large, impersonal, national banks.

Boutique SBA Lenders

When we first started working with buyers and sellers more than forty years ago, the only option for bank financing was through one of the large commercial banks. Over the past decade, however, a new type of bank has arrived on the scene. This type of bank – called a boutique SBA lender –specializes in small business lending.

Boutique investment banks are not traditional banks. They don’t handle deposits, they don’t have physical locations, they don’t offer credit cards and ATMs, check cashing, and other traditional banking services. This type of bank is typically stationed in a satellite office and deals strictly with business customers. They get their funds from investments and securities, not from individuals’ savings and deposits.

For example, one of the boutique investment banks we work with is Fund-Ex Solutions, based in Syracuse, NY. Fund-Ex has no tellers, no drive-up windows, and no ATMs, just business development staff dedicated to researching deals and checking due diligence. While a traditional bank might take 4-5 months to close a business acquisition loan, a boutique bank like Fund-Ex can typically do it in just 2-3 months.

The SBA has screened, qualified, and authorized forty boutique banks to participate in their loan programs. Some of the best business development staff from the big banks have migrated to the boutique banks in recent years because these smaller banks focus on what they do best. For these reasons, most of the deals we’ve been involved with over the past several years have been with boutique investment banks. It’s the new financing of choice for the purchase of small businesses.

Bank Brokers

In addition to working with both boutique and traditional banks, we also work with a number of business loan brokers that each represent anywhere from five to ten individual banks and lenders. If we run into difficulties placing a loan with one of our main lenders, we turn to these bank brokers to find banks and lenders who are interested in pursuing the deal. This provides even more options to our business clients.

Why Do You Need to Establish Good Banker Relations?

When you’re in the market for a business loan, it’s important to establish a good relationship with your banker. Since bankers move around quite a bit – on average, they change firms every three years, especially if they’re good at what they do – personal relationships are even more important than institutional ones.

When it comes to small business loans, especially for acquisitions, the key players are typically business development officers or sometimes VPs of Business Development. Because they work with businesses and business loans every day, they know how to write a loan within their bank’s guidelines and with the insurance the bank likes to see. They have the ability to introduce new programs or guidelines that can help complete a deal more easily. The best of them know how to expedite a deal, smoothing over any potential speedbumps in the early stages of the project.

Establishing close relationships with these key players is essential. The personal relationships we establish help to keep our clients’ deals prioritized and on track. Without a personal relationship, bankers won’t always answer their calls or go the extra mile to help meet the next milestone. You’re on a need to know basis and that’s all you get.

By building a close personal relationship with these players, we can establish an open dialogue about where the deal is and what’s mostly likely to happen next. Our contacts sometimes share confidential information they really aren’t supposed to, just because we know them personally – we get to know their families, their likes and dislikes, where they go on vacation, and what’s important to them. We talk to them regularly, we take them to lunch, we do everything we can to make our business with them personal.

That’s why we make a concerted effort to establish close relationships with these key individuals, not necessarily with the banks themselves. We don’t care who an individual works for, we follow the talent who can help our clients get the deals they need. In the end, it’s our clients who benefit from this personal touch.

Turn to IBEX When You Want to Close the Deal – On Your Terms

International Business Exchange is one of the oldest and most respected M&A advisory firms in the United States – and we can help you find the funding necessary to close your next deal. Our team of eight M&A experts have been helping owners and executives sell their businesses since 1979, executing hundreds buy and sell side transactions for our clients.>

We are dedicated advisors with close relationships to the best and brightest players in the banking industry. Our job is to shepherd you from initial listing through deal close – and help you walk away with the top market value for your life’s work.

When it’s time to sell your business, turn to the experts at IBEX. We will work with you and your buyer to find the right financing and close the deal – on your terms.