A common challenge for prospective business buyers is coming up with enough capital to purchase a business.
This can be an issue related to either the down payment or total purchase price, or perhaps both.
One of the most important assets a buyer can have is the ability to be creative in order to get a deal done since there are always so many twists and turns in these transactions.
Many buyers are faced with the reality that they simply cannot come up with adequate capital to close the deal.
A potential solution is to consider purchasing less than the entire business initially while negotiating a pre-determined formula to acquire the balance at some point in the future.
I have done this on several occasions and mostly because I wanted to really keep the seller on the hook and engaged while I learned the guts of the business. However, the strategy works brilliantly as well when the issue is money.
As an example, a buyer can purchase 60 percent of the company with the option to purchase the balance over time (i.e. 8% per year over five years or the entire remainder is less time). It’s critically important to agree upon either a fixed price or a precise formula to calculate the price for the remainder of the business to avoid any future disputes. From a buyer’s perspective, it’s best to set a firm price in place, however a seller may not always agree. The reason being, if the seller remains involved, they may want to benefit from their future contribution. As such, negotiate a firm price for the first two years and then a formula thereafter (i.e. x times the Owner’s Benefit).
In addition to the financial aspect of buying less than the entire business, retaining the seller with an equity stake can serve to assist the buyer in learning the business better and having an experienced sounding board at their disposal.
A partnership scenario doesn’t mean the buyer isn’t in control; quite the opposite. First, you will be the majority owner. Second, the seller’s role will be diminished over time. Third, the goal is to get to the point where the seller exits completely.
There are simple ways to compile the agreement so as to allow the buyer the full benefit of completing the transaction as an asset sale (a new company is set up and the buyer contributes money and the seller rolls up the business assets into the new entity and the ownership is split as agreed between the parties).
While some may feel they do not want a partner, and that of course is understandable, think of it more along the lines of getting an experienced financial partner who will assist you in completing the purchase. Although there are a series of additional considerations, contractual and otherwise that come along with this type of transaction, rest assured they are all resolvable matters.