Financing and the Mechanics of Sale
Whether your strategy involves a family succession, management buy-out or sale of the business, financing the change of ownership should be a key part of your succession plan.
The key elements you need to determine are:
- What is being sold – assets of the business or shares (which include the ongoing rights and obligations of the business)?
- Purchase price – may be affected by the payment structure and type you negotiate
- Timing and method of payment – for example, lump sum, periodic payments, regular dividends?
- Purchaser's arrangements for financing the transaction
Finding the right financial structure for the transfer or sale of ownership in your business will depend on your own objectives and the different tax and legal considerations of each alternative approach, which must be weighed along with lifestyle considerations. The success of your deal often relies on your ability to involve the right financial, legal and succession planning advisors to help you sort through and evaluate the different options available.
For the purchaser, the key considerations are:
- Identifying the sources and amount of financing which will be available
- Being able to raise required financing on favourable terms
The purchaser's financing may come from a variety of sources, including but not limited to:
- An operating line of credit secured by the operations of the business
- A long-term loan, often to finance fixed assets such as real estate, machinery and equipment
- A vendor take-back, through which you, as the seller, provide a loan or become an investor in the business
- An equity investment
- Outside capital
As a seller of your business, it is important that you evaluate your purchaser's ability to invest in the business early in the process. If the buyer is unable to raise the necessary financing, the closing of the sale could be delayed or even jeopardized. If the purchaser has difficulty raising the necessary financing, it may be advisable to move on to another purchaser, even if you have to accept a lower sale price.