Why the Delta Solution
is NOT “too good to be true”
By Heath Frantzen
Delta Business
Services
When business owners
and potential buyers learn how the Delta Solution is rewriting the rules for
business selling, giving them an opportunity to sell their businesses more
quickly, with fewer hassles, while creating a lifetime stream of income...
they
are usually skeptical.
After all, most of us
have come to believe the old chestnut, “If it seems too good to be true, it
probably is.”
The idea that one
company has workable, proven solutions for all
of the problems plaguing the sale of a business causes some buyers and
sellers to become a bit skeptical.
I can understand
that. After all, I’ve gone on and on
about how the Delta Solution solves all of an owner’s concerns when selling
a business. That’s true enough, but
there are also lots of problems for a potential buyer. How does Delta address issues that buyers
have that often result in “sale fail?”
Let me give you a snapshot
of a few of the top issues facing those who want to buy successful businesses.
The growth cycle for
businesses mirrors the growth cycle for people.
They’re born, they grow quickly, hit adolescence (which is a pretty
funky time), and then reach young adulthood where they can usually take care of
themselves without someone watching them every second of the day. Young adulthood is followed by middle-age,
where everything starts firing on all cylinders. Businesses have similar experiences in this
“prime” period.
Then, something
strange happens. People experience a
“mid-life crisis,” a time when life seems to be an endless treadmill where one
neither advances nor retreats and where longings are difficult to define and
nearly impossible to satisfy. In
business, this period of angst-filled transition is called “No Man’s Land”. It is a place where boulders can roll down on
both sellers and buyers.
Let’s take a look at
some of the more obvious barriers to a successful sale and see exactly why the
Delta Solution is the best, indeed the only, way to overcome them.
1. Falling into the “Capital Gap”
The capital markets
are interesting creatures. I’ve been
operating in the capital markets for the better part of 25 years now and even
won a National Champion of Fundraising title. I can tell you
unequivocally that capital likes what it likes, and hates what it hates. By that I mean deals have to meet certain
criteria to attract particular types of financing, and if they do, there are
usually many sources. But the ones that
don’t meet all of these certain criteria usually can’t attract a single source
of capital. This makes financing for
businesses (the life blood of a selling a business) in the “Capital Gap” a
tricky proposition.
There are three
general categories of businesses: small, medium, and large. Small businesses get financed mainly by
commercial banks that view business loans as individual loans and qualify the
business owner based on personal criteria.
These banks can make some loans, but only up to certain limits—no more
than the borrower can personally repay.
Those are critical words…“personally repay”. For most banks, there is a limit of $500,000
for bank loans, and this constitutes the “floor” of the capital “gap”.[1]
For large businesses,
the opening financing amount for capital tends to be about $5 million (the
“ceiling”). Institutions interested in
financing these kinds of business deals are mainly commercial banks (the
commercial division), venture capital companies, corporate financing arms, and
private equity companies.
The problem for these
institutions is that loan acquisition and servicing costs combined with
risk-adjusted returns to the investors prevent these institutions from
profitably making loans at anything less than a 25% rate of return (interest
rate). Obviously, this is a non-starter
for businesses as these usurious costs of capital would put the enterprise into
a chokehold.[2]
“So what does this mean, Heath?” you may be asking. Well, what I am
about to tell you is the sad truth for mature small and medium businesses who
are stuck between the floor and the ceiling.
There is simply no
capital for your deal. Zilch, zip, nada…
It’s a sobering
reality, and it underscores the number
one problem for business buyers.
It is a big
problem too, because the logical extension of this reality is that not having
capital for buyers also means that there is no capital for sellers either. Both
buyer and seller are in a world of pain due to this fact. The Delta Solution addresses this lack of
capital in a real way by eliminating the middlemen (banks, brokers, finance
companies) who drain the capital well dry.
[1]
No Man’s Land, by Doug Tatum, Ch. 5 pp. 125-126.
[2]
No Man’s Land, by Doug Tatum, Ch. 5 pp. 126.
2. You can’t structure a
deal to make sense
Even with an “all cash” deal structure on a $1 MM cash flow
acquisition (which NEVER happens by the way), a seller would get, say, $3 MM in
cash up front and pay at least half of that to brokers, lawyers, accountants,
lenders and tax authorities leaving them with about 1.5 MM (if they’re
lucky).
Only if a seller is then also very good at investing and
minimizing broker/transaction fees on the investment they then buy, they might be able to net $150 K per
year (10%), which is then taxable and subject to inflation. Going from $1million in income a year to
$150,000 is a big hit. I’m fine with
downsizing, but I don’t think anyone wants to downsize that much!
Even if a seller took back a 5-year seller note at a market
rate of interest, they would get approximately $360 K for the first five years,
but the tax authorities would take out taxes on the capital gains and income
taxes on the interest, leaving a seller with “skin and bones”. Oh, and did I mention it was only a 5-year
note? The checks stop coming at that
point and the asset column becomes bone dry.
Conversely, out of a buyer’s 1 million in cash flow comes the
$360 K in debt service to the seller and approximately $600K to the bank,
leaving a paltry $40 K net for the first five years for a buyer to put in his
pocket— no joy for any professional business buyer, particularly given the risks
involved. In this instance only the broker, the banker and the taxman make any
money on the deal. Delta eliminates this
situation by cutting out the middle men altogether. After
all, why should the broker, the banker, and the tax man get all of the profit
from your hard earned efforts?
3. A buyer has to
make personal guarantees to a bank or other lender.
Another issue buyers must deal with is that they have to make
personal guarantees to banks and other lenders.
Such guarantees provide zero benefit to sellers. Any
astute buyer will structure their finances in such a way that a deal going bad
won't sink them.
Bankruptcy protection ensures that sellers won't get paid out
of a personal guarantee. Banks know this but use it as a limitation on
loans, and will often only loan to wealthy people with exposed assets.
This really puts the buyer at risk for 200% of the guarantee—100% from the business plus another 100%
from additional assets at risk. Delta’s response to this untenable
situation is to collateralize its guarantee.
By doing this, we minimize the risk of default for the seller
and ensure that the assets pledged aren't protected via the bankruptcy
statutes, as they would be with a personal guarantee. This makes it real and ensures that it won’t take
lawyers to get recourse if a deal goes sideways.
At Delta Business Services, we knew we had to fix the
financing issues for buyers and sellers in order to solve a big problem in the
market place. With Delta, the financing
is built right into the deal, which greatly streamlines the entire process for
both buyer and seller.
The reason we're willing to do this is simple: it is a great
deal for us as
well as for the seller. Our unique
proprietary selling platform allows both buyer and seller to avoid the hassles
and stress of the sale and achieve their mutual goals.
And now you see how the Delta Solution is not “too good to be
true”. It’s a real solution to real
problems. facing baby boomer owners who want to successfully exit their businesses.
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