So… you want to buy a business.
Buying a business is not for the faint hearted. It requires a lot of planning, patience and due diligence. It also requires a significant investment of time and money, as well as an appetite for some level of risk tasking. When considering purchasing a business, it is no surprise that the biggest obstacle we face is simply not having the cash flow to make it happen. Couple that with the overwhelming fear that the business will be unsuccessful, and we make no moves whatsoever.
What if we told you that you can buy a business with little to no money, and little to no risk? It might sound too good to be true, but it is in fact possible. This concept is best explained through the following scenario…
Jenny is an ambitious accountant looking for ways to grow her business. Jenny meets Wendy, an older accountant who is looking to wind down her practice and retire. Jenny is interested in purchasing Wendy’s business but has two problems:
- Firstly, she doesn’t have the money to fund the purchase price.
- Secondly, Jenny is concerned that Wendy’s clients will leave the business once they find out that Wendy is retiring.
No money, no problem
The solution to Jenny’s ‘no money’ problem is vendor finance. Vendor finance occurs when the seller of the business funds a portion of the purchase price by allowing the purchaser to pay over time. Using our above example, Jenny would pay an initial amount to Wendy upon settlement (for example, 5% of the total purchase price) and then the rest is paid to Wendy over an agreed period of time in regular instalments. The best part for Jenny is that she is repaying Wendy over time using earnings from Wendy’s business!
Reducing risk of loss
Let’s assume Wendy has had her practice and serviced her clients for 30+ years. Jenny is rightly concerned that those clients will leave once she takes over the practice from Wendy. By linking the amount of the purchase price to the amount of revenue received by the business following Wendy’s departure, Jenny can significantly reduce the amount of risk she is taking on in purchasing the business. This is what we call ‘revenue adjusted payments.’ It works as follows: Wendy and Jenny negotiate a purchase price of $1 million which is based on anticipated revenue of the business being $500,000 each year for two years. If the business meets that revenue target in the first year, but subsequently (as a result of a number of Wendy’s clients leaving), only makes $300,000 turnover in the second year, the purchase price payable by Jenny in the second year will be adjusted by $200,000. This would in turn reduce the purchase price of the business to $800,000.
The above case study is just one example of how our team develops creative solutions to help our clients overcome obstacles and reach their business goals. When a deal is structured in the right way from the outset, it really can be the difference between a successful vs. unsuccessful venture.