Borrowing from a recently revamped Wendy’s advertising campaign, the question “where is the beef” is often translated by business owners into “how will the buyer finance the transaction?”
“In times when financial resources are more limited, a financial structure becomes paramount in facilitating a deal” says Achim Neumann, President of A Neumann & Associates in New Jersey. “A few years ago, deals would usually consist of 75% cash to the seller and a 25% seller note. Increasingly, we’ve seen changes to this ratio.”
When analyzing a financial acquisition structure further, a lender would quite often contribute 50% to a transaction amount— included in the previously mentioned 75% cash. Additionally, where the industry type might be ONE determining factor in defining the contributing amount, it has increasingly become THE determining factor.
“Businesses that are cash flow-strong and have fewer assets, such as service and distribution businesses, need to be matched with buyers that have a strong net worth position” says Neumann. “These businesses tend to have less of an asset base that can be used as financing collateral for a lender.”
Most asset heavy businesses, such as manufacturers—and to a certain degree retailers—have sufficient assets in place to allow a lender to find more collateral within the business, rather than looking at the buyer’s net worth.
In an environment marked by more stringent lending criteria, cash flow-based lending is increasingly in retreat and asset collateral, whether from the investor or from the company itself, takes a more profound position.
Somewhat of a mitigating factor is the SBA lending process. However, it is not the cure or a game changer. “Often, we are approached by buyers who believe that the SBA pre-qualification of our engagements makes any acquisition possible, independent of the buyer’s finances” says Neumann, “but nothing could be further from the truth.”
While SBA pre-approval is an important measure for determining the interest level of banks and the underlying financial requirements for a transaction, in the end it will not significantly divert from basic lending parameters.
“Our company has been fortunate during the past three years, that we had no deals rejected on the basis of financing” says Neumann. “It has always been possible to put deals together. Sometimes, it did require a little bit more seller financing, but ultimately, the deal was closed.”
Achim Neumann, President of A Neumann & Associates, LLC
Atlantic Highlands, New Jersey
The leading Mergers & Acquisitions and business brokerage firm in the tri-state region.
Visit the firm at www.neumannassociates.com or call 732-872-6777