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.
If you missed yesterday, check out Becoming a Better Business Broker Day 8: Navigating the Legal Landscape.
Today's topic, Different Financing Options For Business Sales, is one of the most important aspects of the sale - how the deal gets funded.
Note for readers: since our audience includes brokers operating in both Canada and the USA (both having dramatically different acquisition lending processes). As a result, and to save our fingers, this article isn't going to be an exhaustive deep dive on how to obtain financing, but rather a synopsis of a Broker's role in the process and tips for making your interactions with bankers as pleasant as possible (the humans are great, it's just the paperwork that goes against everything in our entrepreneurial nature 🥴).
Let's stop rambling and dive right in:
The Broker's Role in Financing
As a broker, your primary role is to quarterback a successful sale. This involves more than just matching buyers with sellers; it includes guiding them through the financing process.
Here are a few ways to manage and expedite the financing process (we tried to continue our theme of obscure analogies):
1) Prep The Deal Kitchen
- Have you ever been so excited to try out a new recipe that you skip the prep stage and just start boiling water and heating the pan? Next thing you know you're chopping onions in a dangerous flurry, blinded by tears, while a grease fire erupts behind you - I believe Gordon Ramsay uses the industry term, "Sh** Show" in these moments.
- Why am I talking about cooking? Well, like a master Chef, running a successful financing process involves a lot of prep work. This includes ensuring the client has filed their tax returns, has a qualified accountant, their Profit & Loss matches their tax return, there are no undisclosed liabilities, undocumented workers, etc. Essentially, anything a bank would find in their underwriting due diligence anyway.
- What's the best way to prep all this information? By building a robust CIM/CBR. The best way to automate the writing of a CBR/CIM is using DealBuilder's AI tool where you can implement document collection checklists and custom onboarding steps to make sure your client gives you all the information you need.
2) Educate Your Clients
- Both buyers and sellers may not be fully aware of the financing options available to them. Your job is to educate them on these options and how they impact the sale.
- In Canada, this is often letting Buyers know that the Big Banks are unlikely to offer acquisition lending unless there is real estate or the Buyer already has an existing banking relationship (and can get a Line of Credit).
- In the USA, this is informing your Buyer and Seller that the SBA process takes quite a bit of time, so they will need to be patient. Further, the SBA legislation is changing constantly, so make sure you are always up to date as it can help you close deals. For example, the recent changes to the SBA 7(a) lending program allow (in certain cases) Seller Financing to act as equity in the deal - increasing the purchasing power of every buyer significantly.
3) Become a Deal Lifeguard
- Point out behaviour that seems out of line. In the context of acquisition lending, this is making sure the Banker is following the standard underwriting process, not requesting documents or background information that isn't required.
- Sometimes, you will hear 1 thing from a buyer "The bank requires audited statements" when that is not actually the policy of the bank. Also, try and keep the lines of communication as open as possible - posing general questions into an email thread with everyone CC'd.
4) Prepare the Paperwork
- Yes, this is the part where we question our career choices - but what if we told you there was a better way? The better way is called delegation, specifically, getting Buyers to work with an acquisition Financing Broker. Why? Because these Brokers can apply & negotiate with multiple (or dozens) of banks simultaneously to find the best terms & interest rates for your Buyer. They also take care of all the paperwork and can ‘fact check’ the bank because they are experts in the process.
- If you are looking for a Financing Broker to recommend, a few of our favourites are Ashdown Capital and Levr for our Canadian maple friends 🇨🇦 and Viso Business Capital for the yankee-doodles 🇺🇸
- For those of you in the USA, I know what you're going to say, "Well, if I refer the Buyer to a Financing Broker - I won't get the referral fee from the SBA bank" and you're correct. But on theme with this entire series, we would remind you to 'stay in your lane' and focus on your core competencies. So yes, perhaps you miss out on the additional 1% lending fee, but if referring to a Financing Broker increases the chance of the deal closing by 90% - is that not better for you and the Buyer & Seller? That's our opinion at least.
5) Liaise with Financial Institutions:
- If you decide to refer to a Financing Broker - you can limit your scope of work as a Liaison to simply communicating with the Financing Broker.
Financing Options Overview
If you're a Broker, (hopefully) none of this should be new material, but let's cover a few different financing options available for Buyers & Sellers:
1. Seller Financing
A popular option is where the seller extends credit to the buyer. While most Seller's initial gut reaction is a, "Hell no!" - it can be positioned as an attractive option to both parties for several reasons:
- Sellers can potentially get a higher selling price via the interest earned on the loan. Additionally, in Canada, Seller Financing can also help provide tax benefits.
- Buyers benefit from the flexibility and potentially easier qualification criteria.
- Buyers get 'peace of mind' that the owner's still
Business Broker Tip: Talk about Seller Financing well in advance of going to the market with your Seller. This is a completely new concept for most of them and Seller Financing is not something they anticipate because their real-only transaction financing experience is buying & selling homes, where Seller Financing isn't a factor.
A great way to frame Seller Financing to Sellers is to talk about what they will do with the sale's cash proceeds - likely invest it in the stock market? If yes, you can frame Seller Financing as an investment with the interest rate being their return. The big difference is that it's an investment in a company they know better than anyone else on the planet.
2. Bank Loans
Traditional bank loans are a go-to for many buyers. However, the approval process can be stringent, requiring thorough documentation and proof of the business's profitability.
Business Broker Tip: send your CIMs/CBRs to your go-to banking contact and/or Financing Broker to get the deal 'pre-qualified' for financing before going to market. Get an understanding of how much cash a buyer will need, how much Seller Financing is required, and/or get notified of any deal blockers in advance.
2. (a) SBA Loans (USA)
For transactions in the United States, Small Business Administration (SBA) loans offer a government-backed guarantee which can make it easier for buyers to secure financing. As a Canadian, we're very jealous of the SBA program as it offers an unbelievable opportunity for Buyers to acquire high cash-flow businesses with very little cash down (relative to Canada where you need as much as 25-50% of the purchase price as a down payment). These loans are known for their favourable terms but come with their own set of qualification criteria. One drawback is that the funding process takes several months, lengthening closing timelines.
2. (b) BDC Loans (Canada)
In Canada, the best option for a majority of buyers is the Business Development Bank of Canada (BDC), which offers cash-flow lending (rare amongst Canadian banks) for acquiring small and medium-sized enterprises. Like SBA loans, BDC loans are tailored to the needs of businesses but require thorough documentation and a solid business case.
3. Private Equity & Search Funds
For larger deals or businesses with significant growth potential, you'll start to receive interest from Private Equity (PE) funds or Search Funds. PE and Search Funds are the same concept, with a few differences:
- PE funds generally buy a number of businesses, Search Funds typically buy a single business
- Search Funds are usually operated by post-MBA graduates and skew younger (not always true but common)
- PE funds already have raised capital and the money is in the bank. Many Search Funds need investor approval of the deal to receive their equity - this approval process typically happens late in Due Diligence, which can derail deals at the 11th hour, this has given Search Funds a bit of a bad rep in the Broker community. But like people who put pineapple on their pizza, they're not necessarily bad people.
- 2 types of Search Funds exist - Self-Funded Searchers (the Searcher is using their own money) or traditional Search Funds (they raise a fund - example in the bullet above).
Business Broker Tip: if you develop a good relationship with a Private Equity buyer, they can be a wonderful asset if you represent businesses within their niche. The best way to work with a PE fund is to examine the portfolio companies on their website and determine if they are trying to buy platforms (the first large acquisition in a new industry) or tuck-ins (smaller companies they can buy that fit nicely with their platform acquisition).
They often pay a fair price, can close quickly, and understand the difference between revenue and cash flow. Some downsides are that they are sharks in due diligence and known for 're-trading' the deal and/or being tricky with things like working capital pegs to try and reduce the purchase price - make sure you are well prepared.
When working with Search Funds, the first step is determining if they are self-funded or a traditional Search Fund. If they are self-funded, treat them as a regular buyer but with a fancy website (no offence). If they are a traditional Searcher - you really need to understand their process, who is there LPs (for example: do they have 3 LPs that sign off for deal approval or 30?), and what is the investment criteria of their fund to ensure they aren't wasting your time on a deal that won't get approved in the final stages of diligence.
Conclusion: Getting Deals Financed as a Business Broker
As a business broker, your ability to navigate the financing landscape can significantly impact the success of a sale. By understanding the various financing options and preparing your clients and their documentation, you can streamline the process, making it as painless as possible for everyone involved.
As a reminder, our goal at DealBuilder is to help you close more deals with less work. By leveraging our back-office software with AI automation, you can master the prep work required to get a business approved for financing.
Stay tuned for Day 10, where we'll continue a deep dive into automating your workflow covering Business Broker Technology and CRM Tools.
If you want to learn more about automating your business brokerage with DealBuilder, please visit our site or book a demo here.
