Questions on Seller Financing? ideal amount mergers and acquisitions business brokers smb
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Owing money to a seller when buying a business.
This week I answer two questions about seller financing when buying a business…
One about whether a seller will sue you for the balance if there is a default.
Another about the ideal amount of financing that should be used when buying a business.
Check out my outrageous opinions in this week’s video: • Questions on Seller Fi...
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mergers and acquisitions business brokers smb owner financing
What I like about these videos is they cover deep insights in a deal. This channel is not like other YT channels who focus more on show off . This channel is a true gem for learning about acquiring businesses
Thanks so much for the kind words! Love it.
Dave - this video was right on time. I'm looking at a business right now where the owner is willing to do 50% seller financing. My question is, if I present this deal to a bank are they still going to want me to put at least 10%? Because I only have about 5%. If the loan is SBA backed the banks exposure would be less than normal because of the large seller held note. Also the business has a lot of assets as collateral.
This is why you want a good relationship with a local business banker. You could bounce several ideas off of them. Their job is to get loans out and they'll try and find a way to do it with you.
For example, with so much seller financing, maybe the assets could support a conventional loan and you may not need to use the 7a program. If the assets are solid enough, maybe a leasing company would finance them, then your balance sheet won't matter.
If I were you I would get an LTV of 70% of the assets from a conventional loan from the bank on a 5 year amortization, then 50% seller finance on a second lien basis would be paid back on a 5 year ballon. This gives you an extra 20% as operating capital. Banks should be comfortable with this structure and considering seller carry back as equity.
I would call up many banks and ask “do you consider subordinate debts such as seller finance, mezz, unsecured debt etc. as equity of they are a true payment in kind” usually they do and it would allow this transaction to get through.
Alternatively you could just get a JV partner to put the extra equity in.
Love your video! Found answers to many questions I had!
You're watching a ton of videos!
whats the equivalent of SBA loan in Canada ? I heard you can get loans from BDC for purchasing a business
I love the distinction between tangible assets and goodwill. That makes a ton of sense to me and clears up a lot. Thanks!
Glad it was helpful!
Thanks for putting this out there. There is so much confusion on how much seller finance is appropriate.
I agree with you that the SBA has made it easier to finance deals but it puts more risk on the buyer. It also becomes harder to negotiate seller finance because a lot of sellers see deals close with majority of the money up front.
I think you make a great point when you say the seller should finance the difference between the tangible assets of the business and the selling price. The seller should finance their own “goodwill”
Question - when is it okay to finance 90% of a deal through the bank or SBA? Is it only when the business has enough assets to cover the loan?
Thanks for these golden nuggets David
Great question. I think it depends on the risk profile of the buyer. An individual buyer faces different risks than a strategic buyer who is already in the industry. Those guys sometimes pay 100% cash at closing and it's ok for them because their risk position is determined by the new combined entity.
For the individual buyer, the true due-diligence is only complete after they've had it for over a year, in my opinion, and they really know the business and have lived with the closets and skeletons for a bit to make sure they're friendly.
@@DavidCBarnett This makes sense. Thank you for your response.
Thank you for your valuable insights David.
Has there ever been a need to buy transaction insurance M&A insurance...? What's the value to have it and why/when would you use it? Thanks
I e never even heard of this before. Can you post a link to a company that offer this kind of insurance?
@@DavidCBarnett www.chubb.com/us-en/business-insurance/transactional-risk.html
David ALWAYS brings the receipts! If you’re on the path of buying then his Buyers Business Course is excellent real life material.
Thanks Ben for the kind words.
Thanks David. Good answers as ever. Good point about the goodwill not necessarily being transferable and ideally that it should finance the collateral on the deal. That makes good sense.
Thanks Victor
i love you very much as well
Thanks Gekko!
Would you suggest 25 % buyer sba and 75% seller financing im looking to buy a hotel and I'm looking for ideas
Hmm, without knowing anything about your deal, it's hard to comment. I would recommend you book a call so I can talk the deal through with you. www.CallDavidBarnett.com
great insight
Thanks Patrick
Solid advice David. I don't agree with it being impossible or even risky to buy a biz with no money down as long as you structure the deal right. Generally if you have 50 percent cash flow left or close to it after debt service, it's pretty safe to use asset based lending for the down payment and finance the rest with a mix of seller and other more traditional lending.
But my question to you is what do you think a good rule of thumb is for a seller to take back?
It always makes me laugh when I see brokers touting businesses where the owner will finance 5 percent for 24 months like that's major help.
What do you think is reasonable for a seller to expect to take back?
Thanks
Depends on the tangible asset value. I like to see the seller finance the goodwill portion of the deal. ABLs usually charge higher interest than banks. If you can find a deal where the ABL financing only takes up half your cash flow, then I'd say you've negotiated a very good price. Especially for these days.
Hi David, really enjoying your videos. Just wondering, what is the equivalent of SBA loans in Canada?
If you're referring to government programs that make it easier to borrow there are two. Sort of. The Canada Small Business Finance Act program allows for the lender to get a gov't guarantee on 90% of the loan balance on things such as machinery, equipment, real estate and leasehold improvements. They don't look at a business purchase as one big 'deal.' They look at these components only.
The other 'program' is a bank owned by the government called the BDC. They finance equipment, buildings, etc and also do loans based on cash flow.
Get to know actual people at the bank and your local BDC and talk to them about deals you want to do.
Also, both love to have certain minimum debt to equity ratios so make sure you're not broke. Also the bank program won't finance goodwill and the BDC knows it's etherial so this is why seller financing is usually part of most deals in Canada to some degree.
And, sometimes a substantial degree.