Welcome to our Blog

Our goal is to educate you on all the exciting facets of Commercial Finance. With over 25 years of experience we have a lot to teach you over the next couple of months. If you want to join our growing company we are always looking for new team members.

Tuesday, August 26, 2008

Daily Observations - What Am I To Do?

Tonight's observation asks the question what happens if the deal just does not cash flow, is it dead? My favorite answer to that question is of course It Depends!

While thinking outside of the box is our forte, some time all that creativity can really pay off. Here's an example that I want to share with you.

We were approached on an SBA Loan for the acquisition of a business. The business would not debt service at a greater amount than 1:1, which means that the lender, was not willing to lend the requested amount. The first thought of course is to have the seller carry paper with no payments for a period of time. Most of the covenants that I have read regarding seller carry-backs states that the seller cannot be paid off prior to the SBA Lender being paid off.

However, many of these covenants are not enforced as long as the loan is current, if however the loan goes into default the SBA will find out that the seller was getting paid back in violation of the loan covenants and that can present a serious problem. So I would not recommend this alternative.

Another idea is that of a separate agreement outside of escrow which can be a note between buyer and seller, but again that can create problems for the same reason as above.

The new twist is to structure an Earn Out. An Earn Out allows the seller to lower the price of the business and the buyer to borrow less money, therefore the cash flow would support the eventual sale in our first example. The borrower/buyer and seller agree to a strike price in earnings, and when that amount is earned, the seller starts to receive 50% or whatever amount was agreed to of all earnings in excess of the strike price.

The seller in essence gets a deferred increase in the price of his business that he sells. The buyer get a deferral on the amount he pays. In the end everyone wins as long as the new business does the projected amount of future cash flow.

For more on creative financing techniques visit loanforbiz.com.

No comments: