This year has brought on many changes. We have had to learn to adjust to our new normal and the uncertainty that anything will ever go back to how it was before this year. Even with 2021 a few days away and a vaccine already being distributed, this “new normal” might still be sticking around a little longer. When it comes to selling a business, we have had time to see what works and what does not work in this COVID environment. Businesses continue to be in demand, however the COVID economy has had an impact on the typical business sale deal structure.
Deal Structure: What Has Changed?
· Cash is King
Buyers with cash are getting deals done. Those without cash are more challenged. SBA and other 3rd Party financing has become more of a struggle and sellers have become reluctant to engage buyers who are relying on SBA financing to get a deal done.
· Seller Financing
Sellers offering seller financing are much more likely to sell their business. Removing the bank from the transaction and financing the business yourself gives you more control over the deal. Not only does it indicate to buyers that you have confidence in your business it gives the seller more control over the transaction, and the buyer will benefit by spreading their cost over time benefiting both parties.
Earn-outs are more popular than ever with buyers. However, an earn-out is also beneficial to you as a seller. Why? Well, an earn-out is when you, as the seller, receive additional future payments dependent on the performance of the business. This reduces risk for the buyer and can mean that the seller receives more for his/her business. Earn-outs can be tricky, and the devil is in the details; make sure you work with your broker to be sure the structure of the plan is advantageous to you.
· Third-Party Financing
COVID has made it more difficult to acquire third-party financing. Banks are often looking for a 20%-30% contribution from the buyer before they will approve a business acquisition loan. Banks have also been more particular about which industries they will support. A buyer’s prior experience is more critical than ever in the loan approval process.
· Management Transition Agreements
Seller transition support has become more important to buyers. Most sellers have historically been willing to provide management assistance during the initial ownership transition period. This has become even more valuable to buyers during COVID. Seller transition assistance allows for the smooth transfer of processes and systems that have historically driven the business’ success. It can mitigate the buyers perceived risk of acquiring a new business.
· Key Employee Agreements
Although not common, it benefits you, the buyer, and your staff to include employee agreements within the sale. A business cannot run without its staff, especially those who are familiar with day-to-day operations, sales, and customer service. By including the guarantee of certain staff in the sale, you are much more likely to find an enthusiastic buyer.
If this year has put a damper on your plans to sell and retire or explore new entrepreneurial opportunities, do not let it. There is no reason to keep putting your plans on hold. We are experiencing an unusually high level of buyer interest in business ownership. Many existing business owners are looking for second locations and we are also seeing a large number of folks exiting the corporate world who are seeking entry into business ownership.