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Deal Structure Can Often Be the Difference Between a Business for Sale and a Business Sold

As it is said that there is always more than one way to skin a cat, there is always more than one way to structure a deal! In any negotiation one should always start by identifying and priotizing desired objectives in order to assure that the best value for the business is realized. It is recommended that you engage a trained professional who can evaluate and present various deal structures for your consideration and has the expertise to recommend a deal structure that favors you the most; i.e., one that meets all your objectives and provides the highest yield to you. The ability to creatively structure a deal is often the difference between a business that is for sale and one that is sold.

In selling a business, while an obvious objective for the seller is to maximize return, there are many factors that must be considered. While most sellers want to receive the maximum price for their business at close, one must consider tax implications, risk and the buyer’s perspective.

From a buyers perspective, the lower the required investment, the larger the pool of available buyers and the more likely a deal can be structured. Most people want to work with other people’s money and would have more confidence completing a transaction with financing than one requiring an all cash investment. The seller must appreciate that financial institutions will only fund based on the recorded past financial performance of the company. While everyone tries to minimize taxes, the bank’s (and the SBA) require justifications for seller add backs and will discount many add backs (such as unreported income) that many sellers want included in determining the sale price.

Requiring an all cash transaction generally results in a lower price than one for which financing is available from conventional sources. Lenders will review the historical cash flow of the business to determine how much they will fund, over what period of time and at what interest rate. The amount of financing and terms available will significantly affect the business sale price. While some professionals have the position that you can only rely on the money you receive at the close, and there is risk associated with seller financing, the reality is this is a risk that is also borne by the buyer, especially if he is relying on seller add backs that would not be considered by financial institutions.

Seller financing can provide the seller with a higher net return for his business and lower the tax penalty; however, it does come at a risk of collecting the funds. In considering seller financing you must consider yourself as the bank and place the same requirements on the buyer as a financial institution; at a minimum you should expect to review the buyer’s personal credit report and assure yourself that he has the education and/or business experience to operate your business. The definition of entrepreneur is a person who is willing to take risk. However, if you are financing the deal you should mitigate that risk by doing your due diligence of the buyer.

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