Creates a Need for Creative Exits
[fname], in any slow or recovering economy, capital lending is tight. If
you're reading this and borrowing is difficult then as a business owner you
need to recognize that the capital you generally have required for running
and growing your businesses is equally important to your exit plans.
As a result, when credit contracts, the ability to finance an exit become
yet another challenge to an owner's exit. The good news to this problem is
that necessity is the mother of invention and a few creative strategies
can be employed to make adjustments for your exit.
first point to recognize about your business exit is that you are not likely
to get all of the proceeds for your exit at the time of your departure.
Whether you are selling to an outsider or a private equity group, or you are
conducting an internal transfer such as an employee stock ownership plan
(ESOP) or a management (or co-owner) buyout, you are – under normal
circumstances - not likely to get 100% of your transfer proceeds at the
Now, as consumers of large ticket items - take for example real estate – we
generally do not write a check for the purchase out of our savings accounts.
Instead, we go to the sources of capital that would normally finance those
transactions – in this case, the banks. The bank wants to know three things
when they loan money:
First: the use of the proceeds
Second: how the funds will be repaid
Third: a back-up plan (collateral) for the repayment of the loan
Well, in 'normal' times it can be an uphill battle to illustrate that an
investment in a privately-held business will have the capacity to repay the
loan. In today's environment, the challenge is even greater.
So, what is an exiting owner to do in order to achieve the exit that they
are looking for:
Be the Bank
First, owners should know that they have the ability to 'be the bank'.
Owner financing is more prevalent in internal transactions and in smaller
transactions (less than a few million dollars) where the buyer (or
successor) generally does not have the ability to borrow enough money to
purchase the business.
If the buyer or successor cannot achieve bank financing, it is helpful to
know that you, the exiting owner, can benefit by 'being the bank'. After
all, you know the answer to all of the three lending questions:
First, the use of the proceeds is for your buyer or successor (or
employee stock ownership trust) to purchase the business (or a part of the
business) so that you can exit with the loan payments funding the purchase
of the shares as the loan is repaid.
Second, you know that the funds will be repaid by the business itself.
For internal transfers, you do not need to totally give up control of the
business as part of the transaction. Here, milestones can be established and
the shares of stock can be 'released' to your buyer / successor as the loan
Finally, your back-up plan if the loan proceeds are not repaid is either
taking back control of the assets in the case of an internal transfer – the
business itself which served as collateral for the purchase. For an external
transfer, you can get corporate and personal guarantees for repayment - go
to the "deepest pockets" in the transaction for these guarantees.
Making Money with Your Money
There is an additional benefit to serving as the bank, namely that you will
be able to charge interest on the loan that you have extended to the
purchaser of your stock. In fact, many exiting owners take comfort in the
notion that they will be earning 8 or 9 or 10 percent annual interest on the
proceeds that are owed to them.
In this respect, the exiting owner is once again further compensated for the
risk that they are assuming with the loan. This is no different than the
posturing of a bank in making this type of financing available. Only here,
you, the exiting owner, are the bank and someone else is paying interest to
Many exiting owners who have provided the capital, via 'owner financing'
have found that the buyer / successor is willing to pay a higher price to
acquire the shares of stock. This makes sense for a few reasons. First,
the buyer / successor would not be able to complete the transaction without
your financial assistance. Second, you may be able to structure the
payments so that the buyer / successor pays – and you receive the payments –
in a tax-efficient manner, over a number of years.
When you can negotiate the financing of a transaction with your buyer /
successor under these terms, you hold the same position that the bank holds
in a transaction. Your consent and approval as both the seller and the
financing source are required to complete the transaction.
This gives you another leverage point to negotiate for
a value that meets your financial goals for your exit – which is
the final point.
Reach Your Financial Goals
Once the risk of 'being the bank' has been assessed, it is critically
important to measure whether or not the proceeds (plus interest) will be
sufficient to reach your post-exit goals. Once again, the ability to reach
your financial goals is one of the primary objectives of most exiting
owners. Therefore, if you can get comfortable with the riskiness of the
payments that are owed to you, you can begin to design a customized plan to
receive the proceeds.
Again, there is a risk that the proceeds will not come your way if the
business fails. However, if this risk is low enough, your tax and legal
advisors may be able to structure a very tax-efficient exit that bridges
your financial gap and allows you to meet your post-exit expenses.
In short, an owner needs to be creative with financing sources when bank
loans are not available to finance an exit. When you can begin to think in
terms of being available to provide the financing for a transaction, you can
engage the exit planning process and take the necessary first steps towards
protecting the illiquid wealth that is trapped inside of your business.
Give some thought to playing banker for your exit and you just may find
that a creative solution for your exit appears from this type of thinking.
As always if you need some advice, you're
welcome to email me of call me here at the office at 281-993-4530.
Charles Wilson, CPA/CFF, CGMA, CBEC
Charles Wilson, LLC
307 S. Friendswood Dr, Ste B-2
Friendswood, TX 77546
Charles Wilson, CPA/CFF,
CGMA, CBEC is a Certified Business Exit Consultant and is affiliated with
Pinnacle Equity Solutions, Inc., an Exit Strategies Training and Solutions
company. Parts of the content in this email are taken from previous
Pinnacle Equity Solutions, Inc's. newsletter library and website in
accordance with Charles Wilson's certification in Pinnacle's Certification
and Membership Program. All Copyrights are the properties of Pinnacle Equity
Solutions, Inc. and Charles Wilson, LLC and their respective owners.