Purchasing a company or buying out your partner?
Here is the scenario:
- Buyer wants to buy, seller wants to sell (and that's where the 'easy part' ends).
- Buyer is interested in a) small down-payment; b) smallest possible and longest possible installment plan; c) No personal guarantees; d) best deal and best chances of success for the company.
- Seller would consider installments, if the risk factors (of either the buyer dragging their feet with the installments or the company going under and not collecting anything) can be overcome.
Additionally, there are the following problems...
| Problem | Why is it a Problem | Consequence |
| Problem A - It is very difficult (impossible) for a bank or any institutional lender to lend money to pay for equity in a company. | They do not…
|
It is a waste of time looking at banks/institutional lenders for money to pay for equity. It just won't happen (…unless you have significant personal assets). |
| Problem B - Even if you are able to get money, say from a friend/relative, and buy that equity, banks are VERY skeptical of either new funding or to continue funding the company. | Banks don't like to see new companies or companies whose ownership has changed in the last two years. Indeed, it is a cause of default in most loan agreements. | Even if you could buy into the equity of the company, access to working capital after the purchase is going to be very difficult to come by. |
| Problem C - Waste of time: all this searching of lenders to invest in equity, aside from futile, is very time consuming. | That time can be much better spent in growing the company, opening new accounts, improving quality/service. | It is a big distraction and taking "eyes off the ball" often has expensive consequences, like losing clients and losing opportunities. |
| Problem D - When sellers see poor capitalization (Problem A), they want more money upfront to reduce their risk. | It makes the down-payment higher and therefore the deal much more "uphill" and therefore more risky to the buyer. | Could put the deal out of reach. |
| Problem E - After the purchase, the prospect of investing in the company becomes much more risky. | When a company cannot have access to commercial credit, it is short of working capital. | Any small disruption can cause problems with vendors, making payroll, etc., and the situation can spiral out of control from there. |
| Problem F - After the purchase, chances of getting bank financing down the road become even more remote. | Banks are averse to risk and to companies that are poorly capitalized | Not only is bank money difficult to get to finance the deal, but it is almost guaranteed to continue for the foreseeable future. |
| Problem G - As a consequence of "Problem A" and "Problem B", seller tightens the terms of the deal. | Seller, who wants to sell but knows the business and the risks of being undercapitalized, will want to get more money and faster out of the company. | In the best of cases, buyer ends up paying more and in tougher terms than they should; worse case, the deal falls through. |
What this means is that because of poor financing…
- Too many good opportunities of buying/selling companies never go through; (i.e. everybody loses).
- Deals that perhaps managed to go through, end up damaging the financial stability of the company and the shareholders because of no access to working capital going forward. This too ends up damaging the company and the shareholders.
In a nut shell, how has Capital Solutions Bancorp helped in the past:
- We provide a line of credit.
- We sign a 3-party agreement between the buyer, the seller and us, where Capital Solutions commits to pay the seller - on the buyer's behalf - certain agreed upon installments.
So Capital Solutions Bancorp can provide the working capital before during and after the buy/sell, as well as be a conduit for the installment payments (seller has the certainty that those installments will be met).
Capital Solutions' involvement solves every single problem cited above, from A through G.
And also…
Advantages
For the Buyer:
- Buyer can focus on growing and improving the business, instead of juggling cash flow (ignore this item at your own peril).
- No need to waste time begging banks and investors for money, creating plans, etc.
- Financing in place to grow the company above and beyond paying the seller.
- Better negotiating position to negotiate for better terms from seller.
- No need to commit to a bank with personal assets or have them interfere with management.
For the Seller:
- Certainty that agreed upon installments will be paid.
- Because a) there is financing in place; b) the installments need not be so abrupt, the company has much, much higher viability.
