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    0 Replies Latest reply on Sep 8, 2008 10:17 AM by Adducent

    Bringing On A Financial Partner To Help You Buy A Business

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      There may be times when you are working on an acquisition, where you need to bring in a financial partner. This is often the case if you are a first time business buyer. If you do not have a lot of capital or resources of your own and you find you need the help, it is a great way to get your first deal done.

      Depending on the specifics of the business and deal you plan to structure, one of the best ways to do this is to offer a Financial Partner/Investor loan payments and equity in the deal with a defined exit-strategy. By exit-strategy I mean that you have established a target selling price for the business you plan to buy (that is reasonable and achievable) in a specific time frame.

      There are different ways to structure bringing on a Financial Partner/Investor but here is one to give you some "food for thought". If you have enough value in the assets, you offer the Financial Partner/Investor some security by offering them a lien against assets (subordinate to any 1st lien holder if there is one in place or already lined up) and you will pay them interest on what they loan you in return. To enhance their return to make it a fair exchange because of their risk exposure ... you also provide them a means to profit by equity ownership in the company, where they receive additional compensation when the business is sold.

      Find out from the Financial Partner/Investor what term and simple interest rate of return they need for loan repayment and make sure that the business post-acquisition can support the additional debt. You want to use simple interest if possible to make the strain lower on cash flow but these things are going to be subject to negotiation with the prospective Financial Partner/Investor. As I tell business buyers, be thorough with your evaluation & analysis of the business you plan to buy. Always make sure that the business you buy can support the deal structure and any additional debt used to help buy the business. If it can support that additional debt and leave you adequate margin, find out what additional return the Financial Partner/Investor would like to see (their target rate of return) to make the deal sweet enough for them to make the investment and help you buy the business.

      As an example:

      Let's say that you have found a good solid business for a negotiated purchase price of $5,000,000 (which you've determined is fair and reasonable). You've performed your due diligence, created what cash you can from the deal and your own resources, which came to $3,000,000 but are still $2,000,000 short of what is needed. Again the business is a solid deal that meets all your requirements and has passed due diligence, so you want to really try to swing the deal but need some extra financial help. To give a simple illustration; here is one way to structure the compensation for the Financial Partner/Investor you want to bring on to help you with the deal:

      *Business Purchase Price $5,000,000 *

      Asset Based (or other) Funding $1,000,000

      Seller Financing $2,000,000

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      Purchase Price Short Fall $2,000,000 needed from a Financial Partner/Investor

      ++Financial Partner/Investor target return: 45%

      ++Financial Partner/Investor simple interest rate of return with security lien against assets: 15% ($300,000 annually for a total of $1,500,000 over 5 years).

      Needed to reach target return for Financial Partner/Investor: 30%

      Purchase Price Short Fall x 30% (what is needed to reach target rate of return for the Investor): $600,000 (annually for a total of $3,000,000 over 5 years).

      Target Selling Price in 5 years: $7,000,000

      Based on target selling price this is the percentage of ownership to give to Financial Partner/Investor to cover the equity "sweetener": approximately 43%

      Paid out in 5 years to the Financial Partner/Investor when the company is sold (equity "sweetener") $3,000,000

      I have a spreadsheet tool that I created that helps with this calculation and other parts of deal structure and evaluation to help create cash and funding for acquisitions and leveraged buy-outs. But the above is easy to do with pencil & paper and a calculator or to setup on your own spreadsheet.

      **VERY IMPORTANT:

      Obviously when dealing with prospective Financial Partners/Investors, everything is subject to negotiation to work out the actual details and specific terms. The above is a basic example to give you some guidelines on how this could be structured. In every instance of discussions in the negotiations, you will want to go over the calculations with your financial advisor to make sure that everything fits your situation and is supported by the deal structure and business you plan to buy. Make sure that under your ownership, the business cash flow can comfortably support all debt service and still make it worthwhile to you to run/own the business.

      Remember, when buying a business you want to use legal and financial professionals to advise you, so discuss any structure, offers, documents and agreements you plan to use for your business acquisitions and with Financial Partner/Investors BEFORE, you present them to the Financial Partner/Investor. Never enter discussions with a prospective Financial Partner/Investor without having discussed your approach and presentation with your legal advisor and with the proper legal documents ready.

      Dennis Lowery

      Adducent, Inc.