How to Finance the Purchase of a Glass Business

Marco Terry
February 16, 2018
COMMERCIAL, RETAIL, FABRICATION : FINANCE

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Financing the purchase of a company is a complex procedure. This article offers an introduction to the purchase process for potential buyers interested in looking to expand their glass business by acquiring another company, or looking to get into the glass industry by buying an existing company. Note, any potential buyer should work directly with professionals to guide them through the process. 

Purchase structure

A small business can be purchased in two ways: by purchasing all outstanding stocks (or membership, if the business is an LLC), or by purchasing just the assets of a company without purchasing the corporate shell. Both methods have pros and cons. 

Generally, purchasing the outstanding stock in a company gives the buyer all assets in addition to all current and potential future liabilities. This last point is important, as a buyer could be liable for future issues caused by actions that precede their ownership of the company. In the second method, the purchaser buys only the company’s assets, such as copyrighted trade information, equipment, inventory, client lists, etc. The old corporate structure keeps the liabilities. 

A purchaser’s financing options may vary based on the choice of structure.

Financing sources

Potential buyers should be aware of the various financing sources available. This section lists five sources of financing commonly used to purchase small and medium-sized companies.  

1 - Seller financing

One of the most important sources of financing is provided by the seller. Seller financing is a loan that is amortized and paid over a period of time. The buyer often repays the loan using the proceeds of the business. 

Seller financing is advantageous for two reasons. It is usually available at competitive rates that are negotiable and, more importantly, the loan ties the seller indirectly to the future performance of the business. It helps ensure that the seller was forthcoming regarding the potential performance of the company.

Keep in mind that the seller performs their due diligence on a buyer before providing financing. However, their due diligence is not as exhaustive as a bank’s due diligence. Sellers are generally willing to finance 30 percent to 60 percent of the purchase price.  

2 - Small Business Administration-backed loan

Small Business Administration-backed loans are another great source of financing. The SBA provides guarantees that enable banks to lend funds to entrepreneurs and small business owners who would not otherwise qualify for a loan. SBA loan amounts vary, but the 7(a) loans commonly used to buy businesses can provide up to $5 million of financing.

While getting an SBA-backed loan is simpler than getting a conventional loan, the process still requires bank underwriting. The business being acquired must have enough cash flow to support the loan plus the cost of operating the company. Additionally, the buyers must have industry experience, some assets and reasonable credit. 

3 - Bank loan

An SBA 7(a)-backed loan is a great option for loans of $5 million or less. For larger loans, buyers must use a conventional bank. Qualifying for a conventional bank loan is much harder than qualifying for an SBA-backed loan. 

The company being purchased or merged with must have a good financial track record, solid assets and enough cash flow to repay the loan. Additionally, the buyers must have great credit and substantial assets of their own. Lastly, larger bank loans take time to approve because the underwriting team must review the business thoroughly.

4 - Inventory financing

A buyer can cover some of the acquisition costs by leveraging some assets of the selling company (assuming the assets are free and clear). If the company has a lot of inventory, those assets can be leveraged using inventory financing. This strategy allows the buyer to use those funds towards the purchase cost of the business.

Keep in mind that finance companies never use market value when determining the value of the inventory to finance. Finance companies take this approach because, if they have to resort to foreclosing the collateral, they seldom can liquidate at market value. Instead, the finance company appraises inventory using the Net Orderly Liquidation Value or a similar metric. Depending on the details of the inventory, this appraisal method could shave a substantial part of its value. Furthermore, the finance company allows a buyer to borrow only a percentage of the appraised value.

5 - Personal funds

Every transaction requires a buyer to make a contribution or down payment from their own funds. This part of the offer usually amounts to 20 percent of the purchase price, though lower percentages can be used if the purchaser has substantial seller financing and they are buying an asset-rich company.

These personal funds usually come from savings or stock accounts. A purchaser can also leverage home equity or retirement. However, Commercial Capital LLC recommends against this path, as it is best to avoid risking a home or retirement in the event things go wrong. 

Most offers use multiple sources of funding. A purchaser should always use seller financing if available. Since seller financing seldom covers the whole transaction, a purchaser will have to use personal funds or a loan to complete the purchase. 

Marco Terry is managing director of Commercial Capital LLC, a factoring company and leading provider of invoice financing to companies in the glass industry. He can be reached at 877/300-3258.