Posted 05-17-2019 5:25 pm by
The phrase “no money down” is typically associated with buying real estate. There are numerous courses, books, and influencers teaching people how to buy properties using other people’s money. This leads to a curious question for business buyers… Is it possible to buy a business without using your own money?
1. Selling to key employee. Occasionally, we are approached by business owners who have tried on their own to sell the company to their key employee, but are feeling stuck and frustrated with the process. From negotiations to the lack of understanding of all the details involved in selling a business, it is common for the business sale process to get stuck. Advantage Commercial Brokers are often engaged as a facilitator in the process to guide the deal to closing. Selling to a key employee can be a satisfying way to leave a legacy because you know this person for a long time and trust this person to run your business well, but chances are the employee does not have a lot of cash available, requiring the seller to finance a large portion of the purchase price and/or selling the company at a reduced price than what the market would pay for.
2. Selling to an ESOP (Employee Stock Ownership Plan). In some cases, converting the company into an employee-owned company may be a win-win situation for both the business owner and the employees. Here’s the scenario: the business owner wishes to retire, needs to receive a large sum of cash to exit the company, and desires to leave a legacy. Instead of selling the company to a competitor that may consolidate operations and cut jobs, the business owner decides to leave the company to all of the company employees by turning the company into an employee-owned company. The problem is that the employees don’t have the money to buy the business, so how can the business owner get cashed out? The solution is called a leveraged ESOP. In summary, a Small Business Administration (SBA) loan will be obtained to buy out the business owner. After closing, an Employee Stock Ownership Plan (ESOP) will be established and the company will be owned collectively by the employees. The employees do not have to come up with any money because the bank will lend 100% of the value of the company + all the fees, so it’s really a 110% loan. In other words, the company will get an SBA loan to buy out the business owner, and the SBA loan will be paid off by the company over 10 years. From a confidentiality perspective, the employees do not need to be told before closing. Within ninety days of closing, the employees will get a two-to-three page letter explaining that the company has just been converted into an employee-owned company, and that some interesting things will happen over the next ten years. Each employee will receive shares in the company every year for the next ten years. How many shares each employee receives depends on seniority and the number of hours worked that year. If an employee is age 65 or older, the employee can get cash every year instead of getting shares every year. The ESOP can also be designed so that vesting only happens, for instance, after five years. So if an employee quits the company after one or two years, he or she will not get any shares. Once a year, the employees will find out how much the company is worth, and the percentage of the company he or she owns. For example, the employee will get a letter once a year saying: “The company is currently valued at $4 million. You own 1% of the company, so your shares are worth $40,000. Keep in mind that there is no market for these shares. You can’t sell these shares, you can’t pledge these shares as collateral for a loan, and you don’t get to vote.” For the first ten years, most of the cash flow of the company is used to pay the SBA loan. Once the SBA loan is paid off in ten years, all the cash flow of the company is given to the employees based on their ownership percentage, and it all goes into each employee’s retirement account. The ESOP can also be designed so that the company pays 100% of the health insurance premiums for the employees, and even make 100% company-paid health insurance available to part-time employees. This can definitely be done after ten years once the SBA loan is paid off, or it can start sooner in two or three years after closing if there is extra cash flow left after making the loan payment. As far as management of the business, the buyer of the business is a trust. Using a normal purchase and sale agreement, the trust springs into existence the day of closing. A trustee will be hired to manage the trust on behalf of the employees. The seller and trustee will work collaboratively to find and hire competent management. Ideally, the company promotes from within and the current employees step up to take over any job duties currently performed by the exiting business owner. The end result is that the business owner receives a large chunk of cash to exit the company, and feels good about leaving a legacy. The employees do not have to come up with any money, receive shares in the company over the next ten years, and receive better health insurance in the meantime. Once the SBA loan is paid off in ten years, all the extra cash flow gets distributed every year and put into each employee’s retirement account based on each person’s percentage ownership. Study after study shows that employees become a lot more motivated to work once they have an ownership stake in the company.
3. Selling to an individual buyer. This is the most common way to sell a small business. Whether it is someone tired of Corporate America looking to own his or her own business, or a successful entrepreneur who is looking to buy another business, there are many qualified individuals with the cash and experience needed to take over an existing business. In this day and age, most individual buyers search for businesses for sale on the Internet. Advantage Commercial Brokers has extensive presence on all the major business for sale sites as well as our exclusive buyer database that we have collected over many years. We post confidential ads, send out listing alerts, and notify potential buyers via e-mail blasts based on the buyer’s acquisition criteria. Often times, the best buyers can be someone who knows nothing about your industry, has transferable skills, and is willing to pay a premium for the industry knowledge that you impart. Advantage Commercial Brokers works hard at matching buyers with good opportunities, whether or not the buyer has experience in the same industry.
4. Selling to a strategic buyer. Depending on the objective of the business seller, Advantage Commercial Brokers may send out direct mail campaigns and engage in telephone canvassing to alert companies that may have an interest in acquiring the business for sale. The list of companies contacted is a collaborative decision between the business seller and Advantage Commercial Brokers. Direct competitors are likely to pay the least for the business because they already know the industry and may consolidate operations to further reduce costs. Synergistic buyers may see a great deal of value in acquiring the subject company because the subject company’s client base or technology could take the synergistic buyer’s operations to a whole new level. An example might be a commercial pressure washing company buying a commercial janitorial company. One currently cleans the outside of buildings, and the other currently cleans the inside of buildings. After the acquisition, there will be lots of cross promotion opportunities between the clients of both companies.
5. Selling to private equity funds. In general, private equity groups are not interested in businesses that are too small. Most private equity funds are interested in larger businesses with management in place. If your business has EBITDA over $1 million annually, selling to a private equity group should be considered as part of the marketing strategy in selling your business. Each private equity group has a specific set of acquisition criteria. Advantage Commercial Brokers has an extensive database of private equity funds and can approach the right private equity firms based on your company profile and their acquisition criteria.
6. Selling to a major corporation. Sometimes, the buyer of a small, local business may be a major corporation with hundreds or thousands of locations nationwide whether it is an auto repair chain or a physical therapy chain. There are a few things sellers should expect when selling to a major corporation. One, the buyer will likely change the name of the business to fit the brand of the buyer after closing. Two, the due diligence process will likely be very lengthy and extensive. Major corporations have teams of attorneys and due diligence personnel that will demand lots of records and data during the due diligence process. Three, the negotiation power of the seller may be limited. Major corporations have very specific criteria on what they can acquire. They use their own forms and have their own process. While there may be some room for negotiation, the negotiation room is limited.
Whether it’s selling the company to your employees, an individual buyer, a strategic buyer, a private equity firm, or a major corporation, Advantage Commercial Brokers can guide business owners in Nevada through the process and help them navigate the pitfalls. If you own a business in Nevada and are thinking of selling your business, contact us below for a free consultation.
Aaron Muller, President of Advantage Commercial Brokers, has personally sold over 200 companies for his clients as a business broker. Recognized as an Industry Expert by the Business Brokerage Press, Aaron has over 20 years of experience selling companies with sale prices ranging from $100,000 to over $50 million. Aaron is an Inc. 500 entrepreneur, having built one of America’s fastest growing private companies. Aaron owns multiple companies today, and is the #1 international bestselling author of The Lifestyle Business Owner: How to Buy a Business, Grow Your Profits, and Make It Run Without You, available on Amazon in Kindle, audiobook, and paperback. Contact Aaron at (702) 829-6373 or aaron@acbrokersinc.com for a confidential, complimentary consultation for business sellers in the Las Vegas area.
