No TARP money......No Problem

By now it has been well-documented that the TARP money is not making its way into the hands of small business owners. We continue to see small business acquisition loan requests routinely denied, and even worse, completely ignored by the banks. We sent a small business acquisition loan request to a regional bank and, while they acknowledged receipt, there was no desire to even respond. When we requested feedback we were told that the deal looked real nice and they would get back to us somewhere down the road. Our clients find that kind of non-response irresponsible and appalling. I receive daily inquiries from sellers wondering where all the TARP money has gone. It's a great question, and one we cannot answer.

The apathy shown by the banks could not come at a worse time. There are an enormous number of sellers NEEDING to re-capitalize their business, obtain working capital or sell for some human reason (retirement, illness, burnout etc.) Then, there are the swelling numbers of potential business buyers who NEED to buy a business. These potential buyers are largely middle-to-senior-level executives who have been downsized and the prospect of finding a job looks dim.

The good news is that business acquisitions are possible without the government and banks. In fact, there was a time when banks played a minor role, if any, in small business acquisition lending. So, we now see the market retraining itself on the practice of SELLER FINANCING. In essence, the seller fulfills the role the banks have played, and in the process, gains back control of their goals. For obvious reasons, this form of financing is met with trepidation by sellers. However, with the proper guidance from seasoned advisors, these types of transactions can be more lucrative and provide better security for both sellers and buyers.

One recent transaction will serve to illustrate the need for sellers to embrace the idea of seller financing. We confidentially represented a business services firm in the Chicago area that had a 17-year track record, a stable client base and growing revenues. Our firm attracted multiple buyers and secured an offer from a private investor with solid financials. The deal structure was as follows:

50% - Buyer Down Payment
25% - Seller Note
25% - Bank Note

This business had physical (hard) assets on the balance sheet that exceeded the amount being requested in bank financing. The sellers had a long-standing banking relationship and offered to introduce the buyer to their banker, who was very bullish on this deal. After several weeks of working with bank on what we were told was a ‘slam dunk’ loan request, it was DENIED. The explanation offered by the bank was that they discounted the assets by 60%, an arbitrary amount used by this particular bank, and that this was insufficient to secure a loan. Never mind that the business was well-established, generated significant cash flow after debt service and that the buyers were experienced in the business. Seems implausible, but true! The buyers and sellers were undeterred and we renegotiated the deal with the buyers. We increased their down payment and thus had the sellers fill the void left by the bank.

This type of financing requires tons of creative thinking, experienced advisors and motivated buyers and sellers. In our next blog we will cover both the benefits and pitfalls of this type of financing and how to ensure a successful outcome.