The Transition

posted by David Wolf on Sep 16, 2012 | Comments (0) | Permalink | Trackback URL

I’ll call her, Betsy. She and her husband are about 60 years old.

Betsy and her husband recently lost their jobs. That’s right…both of them! They have some retirement funds available to “invest” into a new enterprise. With unemployment running out, they need to move pretty fast.

Here are some of the questions I suggest they ask themselves, and also the seller of a particular business they are contemplating the purchase of…These apply to anyone in this position:

REGARDING THE PURCHASE OF AN EXISTING BUSINESS. Here are the talking points and questions to consider:

• What is the interest of the current owner in terms of time frame? Why are they interested in selling? What are their own financial considerations once they exit?

• The critical factors can be uncovered in a due diligence analysis, including many of the items per below…

• Get to know and understand the internal economics of the business. You need to understand the cost structures, the cash in and cash outs…

• Know the architecture of the balance sheet. Is capital being deployed and utilized efficiently? Consider the amount and character of the leverage (debt) in the current structure and the proposed (post acquisition) structure?

• Valuation: What is the seller asking for the business? What is the basis for that price?

• If the business is a brick and mortar enterprise ,is the building leased or owned? You must fully understand the terms of the lease and the economics around that part of the deal. Determine if the building owner may want to sell-this could become a factor in structuring your purchase.

• Given the answers to the above, a deal would need to be structured that’s win-win. There are many ways to skin this cat, but I suggest asking if the seller needs all the cash out of the business right now, or if they are willing to carry some or all of the purchase price in a Note. Notes can be scheduled and structured in a variety of ways, and to accommodate a variety of scenarios, so if he/she is willing to carry back a Note, that’s a good start in the capital formation process.

• Debt Financing can be achieved. You will need some of your own capital in the deal. There is in fact money out there that is willing to invest in companies with good economics run by good people. Sources of debt include Merchant Banking Firms, Investment Banks, Community Banks (although this is certainly less the case of recent), High Net Worth Individuals. You can utilize Suppliers, providers of Purchase Order Financing, Contract Financing, A/R and factoring and more “transactional” solutions. Think of capitalizing the purchase as a puzzle with different layers of capital.

FILED IN: Buying & Selling Your Business, Entrepreneurship, Family Business, Finance, Starting Your Business