PERTH, WA: The coronavirus pandemic has wrecked economies across the world on a scale never seen before since the Great Depression leaving governments scrambling to put into place rescue packages in a desperate attempt to save millions of jobs.
As the carnage unfolds, a once in a lifetime opportunity is emerging for mum and dad investors and aspiring entrepreneurs to take the weight off the shoulders of the hoards of retiring Baby Boomer business owners, save their company and thousands of jobs with minimal risk to your assets and your family.
We spoke to Nigel Lo, Managing Partner of the newly established Perth office of GLP Lawyers International on what this $10 trillion opportunity is and how you can take advantage of it while still holding down a full time job.
“Small businesses are unloved. SME owners can’t borrow money from without betting their house. They can’t get investments because they are not able to produce major growth curves to satisfy the appetites of investment banking and private equity. Many are also owned by baby boomers who have no succession plan.
There is a huge opportunity in acquiring these companies and this can be done very often without much money if any, out of the investor’s pocket. Unlocking this skill can have a huge impact on individual wealth.
The secret lies in the terms of the deal.
One very common deal structure that business brokers tend to shy away from is vendor financing.
Vendor financing is a deal structure where the seller would offer in simple terms, a payment plan to the purchaser to repay the purchase price of the business over a period of time. In other words the seller acts as the financier and provides seller financing to the purchaser. This allows the purchaser to take over an established and profitable business without any money out of pocket as long as the net profits each month can repay the monthly repayment cost to the seller. Most importantly, purchasers will not have to mortgage their own home to the bank just to take a bet on the business. The risk is often why 80% of listed businesses fail to sale.
Selling a business is not like selling a house at all. The risk appetite is completely different.
Unfortunately, business brokers tend to shy away from these sorts of deal structure due to the uncertainty around how their commissions will be paid if a vendor financing structure is agreed to between the parties.
There are plenty of ‘no money down’ deal structures being used by some very smart dealmakers but vendor financing as emerged as one of the most popular ways to sell a business without getting the banks involved.
BUSINESS SETTLEMENT PROCESS
If parties agree to a vendor finance structure, the seller will want to ensure that their interests long term are protected and that the purchaser will not default on the repayment plan.
When we act for our seller clients, we will request during the due-diligence period, a copy of the purchaser’s statement of assets and liabilities. Only after the seller is satisfied with the ability of the purchaser to repay the loan will an agreement for the sale of the business be signed.
Accompanying the sales and purchase agreement will be a loan agreement which sets out the terms of repayment. The loan agreement must include a personal guarantee clause and a security clause which gives the seller a caveatable interest on the purchaser’s assets in the event of default.
For purchasers, the benefit of this deal structure allows them to avoid mortgaging their house to a bank and provides flexibility in repayment if the contract terms provide for some leniency in the event of another lockdown or event which causes the business to suffer a downturn.
The settlement process is relatively straight forward. The sale and purchase agreement will set out the date of settlement which the day the business is handed over to the purchaser and the first repayment is made towards the seller. Due to the banks not being involved in the transaction, finance approval is not needed which is often what can cause delays in the business settling on time.
If you require any assistance in buying or selling a business, the firm offers a free consultation with one of our experienced commercial lawyers skilled in alternative financing structures. Our white-glove ‘done-for-you’ service should you retain our firm, gives clients the benefit of our guiding hand throughout every step of the transaction, from investor outreach to due diligence to contract drafting and finally representing you at settlement all with the benefit of a fixed fee guarantee, zero commissions.”
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