In Valuations, Value Enhancement

The financing landscape has definitely changed since the financial crisis. Things are getting better, but lending is nowhere near where it used to be.

Back in the good old days, a buyer would put down somewhere in the ballpark of 15-20 percent, the bank would finance 70-80 percent, and the seller would get almost all their money at the close.

Today, financing in the new norm is really dependent on what kind of buyer is purchasing your company.

For the individual buyer, we’re seeing the purchaser bring equity between 20 -35 percent, the seller does financing of 20 – 30 percent and the lending source is responsible for the balance.

For private equity groups (PEGs), a popular model right now is to come to the table with about 70 percent cash at close. The remaining 30 percent comes as equity that is rolled over into the new company.  Business rates have changed as well.

The strategy is to make sure the seller remains committed to the company and furthering growth. The right PEGs bring capital as well as additional contacts and experience to successfully grow the company with the plan that in roughly five years the company will be sold again.

The idea is the seller takes some money off the table and then gets a second bite of the apple when he/she cashes out that 30 percent at the company’s new, higher value. This strategy is not for everyone as obviously there are no guarantees.

Our most common buyer for 2011 was a synergistic or corporate buyer. For organizations looking to grow, an acquisition is an attractive strategy right now. These companies have strong balance sheets, and that money is earning next to nothing in interest. It’s tough to grow organically in a sluggish economy, so they’re putting that money to work by acquiring synergistic businesses.

For most of our corporate acquisition deals this year, the buyers have been far larger than the companies they acquire. For instance, we sold a $7 million organization to a multibillion-dollar company in the waste industry in Arizona and a $6 million chemical firm to a $90 million distributor in Ohio.

We’re seeing buyers ten times or more the size of the acquisition target because these are the buyers that don’t have to deal with lending. They have cash or a line of credit to use as they see fit.

These buyers won’t normally ask for seller financing, but some will do earnouts or escrow accounts. They’ll set aside 15-20 percent for somewhere from three months to a year or more to ensure a certain percentage of customers transfer. It’s a short term incentive to make sure the sellers do everything in their power to maintain those relationships.

The simple ‘20% down and 80% financed’ deal is a thing of the past. We’re seeing mezzanine debt, seller financing, and even earnouts are becoming more popular again. Overall, to get a deal done in today’s business rates and environment, both sides have to come with an open mind and a lot of creativity.

Scott Bushkie is the Managing Partner/Founder of Cornerstone Business Services, a Lower Middle Market Boutique Investment Banking Firm serving the Midwest. Reach him at 920-436-9890 or

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