When we market a business for sale, we often receive multiple initial offers. No two offers are structured the same so we often put together comparisons to try to get an apples to apples comparison. Below is a chart showing an offer comparison from five different buyers. We ordered the offers from left to right in our opinion of the best offers.
While Buyers prefer seller financing or earn out programs such as retained gallons, Sellers are always advised to get as much cash at closing as possible. As you can see below, Company A is an all cash offer and Company B would likely lead to a higher purchase price. Companies C, D and E were all good offers and higher than the Seller’s expectation, however when compared, it became a choice between A and B.
There are many non-financial factors that go into a Sellers decision on who to choose to sell their business to. There are employee concerns and overall reputation of the Buyer in the community. Those intangible factors must be taken into consideration, however the financial impact, especially for a retiring owner, is typically the starting point in choosing a Buyer.
So why should the Seller choose an offer that will likely result in a purchase price that is lower? It all comes down to risk. Anytime a Seller accepts an offer where they are not paid cash at closing, they risk receiving all the payments. The longer the payout period, the higher the risk.
The Buyer’s bank typically has a blanket lien on all of the Buyer’s assets and the moment the assets change hands, the bank has a first position on those assets and the Seller goes to second position or lower. The term used is that the Seller debt (payments still owed) is subordinate to the bank. If the Buyer falters financially, the bank gets paid first and the Seller waits to see if there is money left to pay them.
Successful Buyers understand this and often have acquisition lines in place so they can pay cash or mostly cash for a business. Is there risk for a Buyer? You bet there is, and that’s why it is important for a Buyer to do their homework on the Seller and make sure they are going to retain the business after the sale. Successful Buyers understand that if they lose a large percentage of the customers it is the Buyer’s fault. Buyers can also offer personal guarantees or first position on other assets such as real estate.
An interesting scenario we have come across is a Buyer who offered a straight retained gallon purchase but paid 80% of the projected amount at closing. That amount was guaranteed no mater what the gallons were. They also paid cash for the vehicles, propane tanks, non-compete and inventory. The total was slightly lower than straight retained gallon offers we received, but the security was better. The Seller felt that they were selling for cash and the Buyer felt they were purchasing on retained gallons.