Why Sellers Should Consider Leveraged Buyers – From Jordan Zweigoron

If I had a dollar for every Seller who dreamed of finding an all-cash Buyer, I’d have enough money to buy a business for cash myself.

Although it’s entirely rational to expect cashing out of your business at 100% when the deal closes, in restricting your sights to cash-only Buyers you may be creating unanticipated limitations.

A simple truth about Buyers

Cash Buyers are a rare commodity. Most Buyers of small businesses do not have the cash reserves to pay full amount of a purchase price upfront. And, even the Buyers who may actually have the means are usually inclined to leverage their business purchase in ways that preserve their own cash. Therefore, Sellers who are intent on finding only a cash Buyer put themselves in a position of having a very limited pool of prospective Buyers.

Seller’s Note

In an attempt to mitigate a cash-only deal, Buyers often look for a Seller’s Note – a means of having the Seller provide a loan (for some percentage of the business purchase) for a defined period of time. Some Sellers have an initial knee jerk reaction to the notion of a Seller’s note, however there are many merits. With a Sellers’ note, a Seller is effectively creating an interest-bearing annuity for themselves. This can be a useful tool, particularly to Seller’s who are planning to retire. Additionally, Seller’s notes may have tax advantages; because the notes effectively spread the business sale proceeds out over several years, which could minimize tax burden (Sellers are advised to discuss this with their CPA).

Earn-Outs

Another common vehicle that Buyers routinely employ is an earn out. Earn outs are conditional payments which occur after the sale transaction is completed, and only when particular metrics are satisfied. A good business broker can help a Seller to negotiate favorable earn out terms. In many cases, an earn out can be structured in a way that Seller’s earn an incremental bonus when earn out metrics are not only met, but also exceeded; and in many cases, a Seller can receive a consulting opportunity to stay on board to ensure the earn out metrics are satisfied. Employing strategic negotiations around earn outs, a Seller has the potential opportunity to earn even more than they bargained for.

More Options = More for You

Sellers who remain open-minded – to Buyers who present themselves with a variety of funding approaches – can reap the benefits of a larger pool of Buyers to choose from, create potential tax benefits and, generate possible incremental approaches to increasing the overall deal value.

Jordan Zweigoron is a Senior Advisor with Sunbelt Business Brokers. He can be reached at (408) 436-1900, x105, or at jordan@sunbeltbayarea.net. Or connect with Jordan on LinkedIn.