It is David Barnett
once again and this week the question I received was is it normal when you buy
a business for the vendor to finance to 20% of the purchase price? Now I have
done other videos about vendor financing or vendor take back notes. And this is
the first time I have had a question about the normal level of financing that
we might expect for a seller to do. The reality is that the amount of financing
that a seller has to do relates to two things; number one
how quickly does the seller want to move the business? The biggest impediment
to selling a business is the access to financing. So, when I was a business
broker and I had sellers that wanted to sell a business very quickly. I would
advise them that if they were more willing to hold more paper on the deal or do
a bigger vendor take back. Then we would likely be able to sell the business
faster.
The second
consideration involved is how many and
what kind of tangible goods are included in this business sale? The amount of
tangible goods included in this business is going to determine what kind of
traditional or institutional bank financing that we are going to be
able to obtain. So, if there are hard assets in the business such as equipment,
machinery, vehicles etcetera. Then we are going to be able to bring a
traditional bank lender in; that means we are going to be able to get more
traditional financing. We don't have to ask the vendor for as much vendor
financing; now in the question it mentions 20% but in my experience I have seen
across the spectrum. Equipment intensive businesses where the buyer had lots of
money, the buyer was able to get bank financing. And basically asked for
10%-15% vendor financing just to give them a little bit more security and to
give them all the positive advantages that I talked about in other videos about
why you need to do a vendor take back when you are buying a business.
In other cases I have
had service oriented businesses without a lot of equipment and material and
they have sold with, I have had one that sold with 75% vendor financing. So,
quite literally the buyer put in 25% and the seller finance the balance. There
was even a period of time back after the financial crisis of 2009 were we did
several deals in my business broker shop, without any banks involved at all.
They were entirely deals with buyers and sellers where the buyer would put down
money, either from saving or perhaps from a personal debt tool like a line of
credit for example. They would put down their money and the vendor would
finance the balance; and most of those deals it was between 40%-60% vendor
financing, so there is no hard and fast rule when it comes to the amount of
vendor financing that you might expect in a deal. Basically,
it's completely up to negotiation and it is important that when you
are buying a business that you ask, ask for the world. They are just going to
say no, that is fine, that is part of negotiating.
And from the seller's
point of view offering a greater amount of vendor financing can help sell the
business more quickly. But more importantly, it can help you actually sell it
for a value closer to its true value. Because, the difficulty of course is
always getting financing for that goodwill component and no bank is
going to finance a 100% of the equipment for example. So the buyer needs to
have some equity to offset what the bank is going to give him and in order for
a seller to enjoy that last little bit of value to bring the price of the
transaction up to where it should be if it is a profitable business. The seller
has to be there to finance it, there is just no other place to get the cash and
I have often had sellers tell me that they didn't want to finance a buyer when
they sold their business.
And I advise them that,
quite frankly what would happen is because they weren't willing to finance
buyers wouldn't be able to put a deal together. The business would sit on the
market for years and years and eventually the seller would start to lower the
price to the point where they would end up with the same cash on closing as
they would have if they had sold years earlier and would have been willing to
accept some amount of vendor financing. So, it is really a win win tool for
both; it can help secure the buyers position, it can help offset some of the
risk by transferring it from the buyer to the seller. I have
explained that in other videos and really buyers should be asking for as much
vendor financing as they can get. And sellers should be using vendor financing
as a way to get the price that they are after.
Anyway, I hope that answers the
question and don't forget if you enjoy my videos and you like what I have to
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