Hard economic times may be a good time to sell, after all …

In the Monday (22 December 2008) edition of the Calgary Herald, business writer Chuck Chiang  (http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=3fe827ce-4fc4-43c6-a7d5-04f648fd09fb) reminds us of something very important. Corporate layoffs tend to go for the middle ; experienced (but not yet too high in rank) management, people with proven ambition and business- and tech- saavy.  Listen to those pushed out and you hear, time after time, a sense of the need to have more control in their financial lives.  Historically, this is the kind of group that generates the most successful entrepreneurs.

So, potentially at least, there are more potential buyers out there ‘kicking the tires’ of companies.

‘problem is, banks and typical sources of funding are so breathtakingly cautious these days, getting money to pay the seller is the core of the problem.

There are a lot of ways to be creative with financing. Two of the most common (and they aren’t necessarily exclusive of one another) are (1) seller financing and (2) earnouts .

From CalhounCompanies.com, an excerpt describing these two scenarios: http://www.calhouncompanies.com/articles/creative-financing-for-buyers.asp

1. Seller Financing – Increasingly, buyers and lenders are looking to the seller for financing as they try to put a transaction together. In such a scenario, the seller will hold a note at an agreed upon interest rate for a specific term or amortization – generally ranging from five to 10 years.

The terms of the sale may include a balloon payment three to five years after the purchase date. It’s a way of giving the buyer time to get up and running and to establish a successful track record with the business.

Seller financing makes the bank more comfortable with the transaction. Lenders know they have a seller who has a vested interest in the success of the business rather than one who will take their money and run.

2. Earnouts – Earnout financing involves a certain dollar amount agreed on by the buyer and seller to be paid to the seller based on the performance of the company after the transaction is completed.

Earnouts can be structured in a variety of ways and can be based on different financial benchmarks such as a company’s revenues, gross profits or net income.

Earnout financing is often used for companies that are in a turn around situation or when buyers are purchasing on potential, rather than on historical cash flow.

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