Welcome back to Becoming a Better Business Broker in 30 Days!
This concise series title describes exactly what we hope you get out it - becoming a broker that can close more deals with less work.
Before diving into today make sure to check-out our last article, Nightmare on Main Street - Clients to Avoid.
In today's article, we're switching back to deal-making mode and discussing, Unorthodox Deal-Making Strategies.
One of the biggest differentiators of a Top 1% Broker is their ability to overcome difficult barriers to get deals done. Whether this is a large valuation gap between buyer & seller, financing challenges, or pesky landlord - they're able to make it work.
In this article, we'll discuss a few unorthodox deal structures to help you get deals across the finish line.
Embrace Creative Financing Solutions
Your Buyer and Seller are practically in love, a perfect match. Everything is going smoothly, diligence has been a breeze - until you get an email from the bank. You know the email - yeah the one that says there is an issue with financing.
When traditional financing falls short, it's time to think outside the bank. Consider seller financing or an earn-out, where the seller agrees to finance a portion of the purchase price. If you're an experienced broker you'll already know that Sellers don't love either of these structures. Here are a few ways to improve the situation:
- Balloon Payments: In this scenario, you structure the Vendor Take-back Note (VTB) to have an interest-only period and then a balloon payment associated to the year-end EBITDA. Using small numbers, say the VTB is $100,000 at 6% interest. In this scenario, the Seller will receive $6,000 for the year. Perhaps there is an agreement that at the end of the first 12-month term, there will be a lump-sum payment of 60% of the VTB using the earnings of the business. This is especially helpful when businesses are seasonally profitable ("losing money" technically in the off-season) - taking a lot of financial stress off the buyers, while not forcing the Seller to wait 2-5 years for a full pay-out.
- Retention Bonuses: Often Buyers will require a Seller to stick around to help with training & transition but fear the Seller will leave shortly after closing. To mitigate this, incorporate a VTB note that is paid out only if the Seller remains working for the business. We're currently working on a deal where the Seller will receive 3 payments, each related to 4-month time intervals (12 months total) to ensure they are motivated to stay on after closing.
- Dual-Sided Earn-Out: We made this sound like something new, but it's not. A 'dual-sided' earn-out is your standard earn-out, only with an upside for the Seller if the business actually improves its financial performance after the Buyer assumes control.
Real-Life Example
For example, in a recent deal, the Buyer offered the following earn-out that offered equal upside to the Seller:
When used appropriately, Seller Financing or an Earn-Out can be particularly appealing in smoothing over buyer concerns or when buyers face capital constraints. This aligns both parties towards the continued success of the business post-sale.
Leverage Lease Assignments and Modifications
Real estate can often be a deal-breaker, especially with "pesky landlords" or when the terms of a lease are less than favorable. Negotiating lease assignments or modifications can be a game-changer. This might involve securing a longer lease term, adjusting the rent, or altering the use clause to benefit the buyer. Demonstrating to landlords the benefits of keeping the business in place under new ownership can facilitate these negotiations.
Real Life Example
In a recent transaction, this involved having the Seller personally guarantee the remaining term of the lease (12 months remaining) as requested by the Landlord as the Buyers were immigrants to the country with minimal credit history. While less than ideal, this was ultimately required to meet the Seller's goals of selling by a certain date.
Utilize Roll-Over Equity
In situations where owner dependency risk is very high, pitch the Seller on rolling over equity as a part of the transaction. If you want a deep dive into roll-over equity, check out our 101 guide.
Real Life Example
Just like a Hollywood relationship, sometimes big age gaps can exist between business partners. These scenarios are perfectly suited for rolling-over equity. How does it work? Well, the younger business partner will continue operating the business (often as CEO or General Manager) retaining some minority equity position alongside the Buyer.
Recently, this involved a sizeable home services business where health issues forced the older business partner to exit, while the younger partner retained equity and partnered with the Private Equity Buyer.
Convert Fixed Assets to Leased Equipment
In some scenarios, converting fixed assets to leased equipment can be a strategic move to make a business more attractive to potential buyers. This approach can reduce the upfront capital required from the buyer, making the deal more financially accessible. By transitioning from owning to leasing, businesses can also enjoy more flexibility and potentially better manage their cash flow, which can be a selling point during negotiations.
This strategy can be particularly appealing in industries where equipment technology evolves rapidly (or where the existing equipment degrades quickly), as it allows the business to stay up-to-date without significant capital expenditures - ultimately making the acquisition more attractive.
Real Life Example
We were once involved in the sale of an equipment rental business, where a lot of the business assets (equipment rentals) were nearing the end of their useful life. Any Buyer would have required the Seller to replace a majority of the equipment before the Closing Date - eliminating any proceeds of the sale. This also didn't make much sense, since the Seller would not benefit from any of the future profits from the replaced equipment. One solution was replacing a majority of the heavy equipment with long-term capital leases, making the business model more capital-light, giving the Buyer up-to-date equipment, and saving the Seller significant CAPEX.
Offer Consulting Agreements
For sellers who are critical to the business's operation and success, structuring a consulting agreement as part of the deal can be a win-win. This ensures the buyer benefits from the seller's expertise during the transition period, reducing the risk of operational hiccups post-sale. It can also provide additional income for the seller, making the deal more attractive.
Real Life Example
In the sale of an online insurance marketplace, a large portion of the platform revenue was from the Seller's work as an Insurance Broker on the platform selling a niche insurance product. As a result, if the Seller left the business, revenue would have dropped significantly.
To address this risk, the Buyer and Seller created a very unique deal structure, creating multiple 'bonus payments' for the platform reaching certain revenue milestones, giving the Seller a favorable commission split, office allowances, and more. These 'perks' helped the Buyer and Seller bridge the valuation gap that existed between both parties.
Conclusion: The Art of the Possible
In the world of business brokerage, the ability to think creatively and propose unorthodox deal structures is what separates the good from the great. By embracing these strategies, you can overcome common barriers, making deals more attractive to both buyers and sellers. Remember, the goal is not just to close deals but to close deals that provide lasting value and satisfaction to all parties involved.
Can you keep a secret? Learn if you can in Day 21 as we discuss the Importance of Deal Confidentiality.
If you want to learn more about automating your business brokerage with DealBuilder, please visit our site or book a demo here.
