The kind of business we find for you will be driven by the acquisition criteria we develop together. However, the types of businesses we have helped people with cover a widely diverse spectrum and include technical placement, software and presentation packaging, digital video production, glass products, promotional products, voicemail and communications products, clean room products, semiconductor equipment, computer training, technical publishing, market research, commercial printing, mailing and fulfillment, point of purchase display manufacturing, strategic retail, commercial winch and hoist manufacturing, construction product distribution, home improvement, and construction related companies.
The reasons are numerous but include the owner’s concern about confidentiality, a lack of knowledge about how to sell, inertia, and the fact that there are few intermediaries who serve the mid-sized manufacturing distribution markets.
Although you can essentially “buy a job” in a small retail operation for less than $100,000, most of our clients are interested in acquiring a company with growth potential that will enable them to build equity and net worth. A company like that costs more. Generally, you should expect that the minimum price for a company with some momentum, critical mass and growth potential will be at least $300,000. Most of our transactions are from $200,000 to $20,000,000 range.
You should plan on having to make a down payment of at least 30 to 50% of the purchase price. With bank or SBA guaranteed financing, you may be able to reduce that to 15%. In addition to your down payment, you will need working capital and growth capital, either in cash or in the form of available credit lines. Roughly, you’ll need a minimum of $100,000 in down payment and working capital to purchase and fund a small manufacturing, distribution or services company.
There are three main forms of acquisition financing:
Seller Financing – This is the most common way small business purchases get financed. Seller financing commonly requires a 30 to 50% down payment with a Seller note for the balance of the price amortized over 5 years at 10%, but the variations are endless.
SBA Financing – U.S. Small Business Administration guaranteed financing is increasingly common but requires a fair degree of paper work and patience. SBA guaranteed financing is actually a loan from a conventional lender, guaranteed by the SBA, which makes the lender more willing to extend acquisition financing. An SBA business acquisition loan usually requires 15 to 20% down, and is amortized over 10 years at up to 2.75 points over prime rate. SBA loans are usually only purchase money loans, not working capital loans.
Conventional Financing – Local business banks are sometimes willing to extend purchase money and working capital loans, but usually the buyer and the business have to be very strong, or solid collateral outside the business has to be available.
There are four basic classes of collateral. How much is required varies from deal to deal.
Guarantees – If you form a new corporation to acquire the business, you will probably have to personally guarantee the corporation will pay off any loans made to it. Your performance can also be guaranteed by someone else.
Assets of the Business – The lender will usually expect to lien the assets used in the business.
Real Estate – If the assets of the business are insufficient to fully secure the loan, additional real property collateral may be required.
Other Assets – Ducks, pigs, vehicles, fine art work, jewels, gold bullion…there are lots of possibilities.
The business press would have us believe that buying a business and owning a small company is fraught with peril. Although there is risk in business ownership, the risk need not be excessive and certainly can be managed. Risk management starts with working from a good set of acquisition criteria. If you set up a good team of competent advisors, investigate the company carefully, prepare detailed cash flow and financial projections, and design a transaction insuring the post-sale support of the seller, the risk factors should be dramatically reduced. Another common misperception promoted by the press has been that entrepreneurs are risk takers. That is rarely the case. Although what they do may look risky, upon future investigation you’ll find great attention has been paid to risk management…which is why there are so many good small companies in the world. Look around. There are a lot more small companies than big ones, and often the owners make a lot more money than the top management of the big companies.
After observing many successful purchases, in fact, knock on wood, none of our transactions have been failures. We have seen that the skills and knowledge of senior corporate managers are very applicable to operating and growing a small company. Often, it’s like turbo-charging the business. The most consistent challenge we hear from our clients who have bought a company is not whether they are going to survive, but rather “Wow! How do I fund this growth?”
Assuming the company you wish to buy is organized as a corporation, you have a choice of buying the stock of the company from the company’s shareholders, or buying all or some of the assets of the company from the corporation. The assets of the company are both tangible and intangible, and they include such things as cash and accounts receivable, inventory, equipment, intellectual property, contractual rights, and goodwill. Although you need legal and tax advice on this issue, and there are many other things to consider, here is a brief and very general comparison of the two alternatives. Each deal will be different, resulting in differing weights to each factor and possibly differing decisions as to whether you want to buy stocks or assets. There are also a variety of creative ways to structure a transaction to “have your cake and eat it too”, at least to some extent. In general, the shareholders of a C-corporation will have a strong tax incentive to sell stock to avoid a double tax on the sale of the corporate assets; first at the corporate level and then at the shareholder level upon distribution of the proceeds of the sale.
We need you to complete a confidentiality agreement, a buyer profile, a financial statement, and an agency disclosure. Click on the links to these documents to download for individual or corporate. These forms are necessary to ensure confidentiality. The seller doesn’t want their employees, vendors, and customers to know they are selling.