Buyers of a business arrange the financing with the sellers.
So you're hot to buy a business, but you don't have the cash to buy it, and leveraged deals are out.
Your options are tight, but if you have credibility with the sellers, the best plan may be to arrange financing from them. Offer to buy them out with regular payments over 5 or 10 years. That's what Duane Geyer and his three partners did a couple of years ago, when they purchased Norton Ditto, an upscale clothing retailer in Houston, from two brothers who'd owned it for nearly 50 years.
Geyer and two of his partners had worked in the business since the 1970s. As the longtime owners contemplated retirement, they explored the notion of selling out to the foursome. But how could a deal be structured to account for the would-be buyers' inability to put up more than 25% of the purchase price in cash?
The sellers offered to give them a 10-year note at 12%. After cranking out a series of cash-flow projections, the four buyers agreed to it. The deal did more than permit them to buy the business without the help of an investor or loans, notes Geyer. "We also liked the fact that we didn't have to grow the business much at all to handle the cash flow."
Every month, Geyer and his partners write a check for a fixed sum covering principal and interest. The sellers get additional monthly payments for a pension plan and a "covenant not to compete." (See "Striking a Better Deal," this column, September 1991, [Article link].) Under the terms of the note, the new owners have provided personal guarantees of payment.
But there are no restrictions on additional borrowing from banks or other lenders, Geyer notes, should the business encounter a need for it. "This was a great way to meet their needs and ours."