Dick MC Mahon

Archive for the ‘Business Broker Franchise’ Category

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Seller financing

A seller that is willing to accept terms will usually have a different price for a financed deal versus cash only deal. If the buyer is asking for terms, then their negotiating position is weaker than if they were paying the cash out price in full. It does not matter to the seller if some of this money is from a loan from another source.

If terms, using the seller, are the only way the deal can be floated, then this will take some serious discussion as to length of time and the amount of the loan. The balance will come from money the buyer has access to. The purchase price of a seller-financed purchase can carry a premium of 40 to 60% more than the cash price. It is obviously in the buyer’s interest to get the money elsewhere so that the cash only price can be met.

This large variance in price makes for spirited negotiating and leaves a great deal of room to come up with a deal. This is where a third party like a business broker is very useful as they have been through this stage of a sale many times. A broker would have more experience at this deal making than either the buyer or the seller in most business sales.

Third party financing

If the company being purchased has a solid financial history that can be documented by a CPA or a business attorney, then it may be possible to get some financing from a bank or a private lending group. The buyer would also have to have a very good credit rating, as the loan will be made to the buyer and the business with both responsible for the loan.

A private lending group may be a little easier to get a loan from, but the interest rate would probably be higher.

It may be possible to get the needed money from relatives or friends in order to make the purchase. In any event is it worth trying all avenues to get the needed funds. The worst that can happen is the answer is no and the deal cannot be made.

Other possible money sources

It may be possible for the buyer to become a majority partner for a time with the old owner in order to make the sale. All of the business liabilities would be the new owner’s problem, but the old owner could be a participant in the business until it is paid in full. This would be a tricky negotiation, but it could be pulled off with a motivated seller.

One source that may have real possibilities is the use of angel financing. This is money put up by an investor or investor group to help a company with good prospects grow. The buyer would be advised to see if this is a possibility as there are many advantages to this way of raising money. The best part being that the money does not have to be paid off until the company is sold or taken public. If the company has prospect like this due to an invention or a new product, then it is possible to attract some attention.

Caveats for both the buyer and the seller

Any financing that is arranged to make the purchase must be based on reasonable growth for the foreseeable future and not a huge increase in business. If the increase does turn out to be better than expected, the buyer will be able to retire the debt sooner. But, the buyer should not count on this in order to make the payments. The payment needs to be structured using conservative projections for the business’s future sales and profit. Any other scheme could be destined to failure from the get go. A payment plan that is based on pie in the sky will work to the buyer’s detriment and the seller will end up with a repossessed business that could be harmed by a desperate owner. This would be a very bad arrangement for all concerned.

The secret is to come up with a plan that will work if everything stays exactly the same. If the business has a steady flow of cash over time, then it is likely that this will continue into the future. This plan will lend itself to completion that is in every one’s best interest.

All business deals are unique

Almost all sales of a business are unique and require a different approach in order to pull the sale off. Fixed multipliers are just guidelines to come up with an asking price and are not set in stone. Subjective values of businesses are the norm and may well be why a pro needs to be brought in to evaluate the business’s value. This is the key to future financing whether it is the seller that makes the loan or another party. If the business is one of a kind it is even more difficult to come up with an asking price. In this case it is even more important to hire a certified business broker Find a business broker near you. Putting a value on an existing business is part real numbers and part a skillful art. At least the pro has some idea of where to start when coming up with a price.

Conclusions

Early in the discussion of the sale of the business, the air should be cleared as to where the purchase money is coming from or if the buyer is going to need to use financing to make the purchase.

The seller needs to let if be known if they are willing to accept terms or finance part of the purchase price. If they are looking for an all cash deal, then this should be stated also.

Laying out the cards early lets both parties know if they should continue the discussion or move on. Structuring a business purchase is all about factual discussions and obtaining the pertinent information. Honest disclosure will move the deal along faster if the discussion is acceptable from the beginning.

If the seller and the buyer are still interested at this point, then further discussions could be held with the hopes of finding an agreement that works for both. Since terms are part of most deals, this is not usually an obstacle. If there were no seller financing then many deals would never be finished as other financing would not be available. As it turns out this is the grease that makes deals slide together and become a win-win situation.

As someone who has been in franchising for 35 years I’ve seen a number of changes especially in the area of franchise structures. These structures include area developers; master franchisors, regional developers, development agents and the old reliable sub-franchisor (I prefer to use that term with a hyphen) come to mind.  Often times these titles are used without regard to their true meaning. Usually it’s a prospective franchisee that becomes confused and doesn’t fully understand the correct definition until they speak with their franchise attorney.

I hope to put one of the most misunderstood terms to bed once and for all. That term is sub-franchisor and its subset sub-franchisee. According to the FTC the definition of a sub-franchisor is as follows:

A “subfranchisor” is a person “who functions as a franchisor;” by use of the qualifying phrases “grants a franchise” and “participates in the franchise relationship,” the amended Rule clarifies that in order to be considered a subfranchisor, a party must have – as a franchisor has – (1) the authority to enter into a franchise agreement (or another agreement relating to the franchise), and (2) as a result of entering into such an agreement, that party is obligated to perform after the purchase of the franchise is consummated.

Franchisor means any person who grants a franchise and participates in the franchise relationship. Unless otherwise stated, it includes subfranchisors. For purposes of this definition, a “subfranchisor”means a person who functions as a franchisor by engaging in both pre-sale activities and post-sale performance.

The FTC explanation continues in part:

The role of a subfranchisor is materially different from that of a broker, for example, because a broker typically is not a party to the franchise agreement and does not have post-sale contractual obligations to franchisees.

Why is the term so often misunderstood? I believe because people sometimes confuse the contractual obligations an entity has with certain duties they perform. Although an area or regional developer may have certain responsibilities from a franchise sales, training and support standpoint most of these entities are not a party to the franchise agreement. Rather franchisees they recruit and train enter the franchise agreement with the franchisor.

So where does sub-franchising take place? In almost all cases when a franchisor grants licensing rights to someone in another country and that licensee enters into franchise agreements with franchisees in their own country or territory.

I hope this clears this one up once and for.