What is the role of seller finance in a business acquisition?

[John Paulson]

I recall reading a BBC article in Q1 2021 which said that a consortium of international investors agreed to purchase Edinburgh Woollen Mill, Ponden Homes and Bonmarché from Philip Day, but that Day would loan the group the funds they needed to facilitate the acquisition.

Why do sellers agree to offer the buyers the capital they need for the deal? Are they just hoping that, if the buyer defaults on the loan, they can take control of the business back while cashing the interest payments, and if the company files for administration, as a major creditor, they can maximise their claims on the company's assets?

Or could it be that they can't raise enough capital to sell their stake in the business, so might maintain a minority stake in the business (I think this might have somewhat been the case with Walmart and Asda, as they haven't completely divested from the business, although I don't think they resorted to seller finance) by lending capital to the buyer to facilitate a majority takeover?

Are they hoping that you can buy them out over time with incoming revenues?

Are the interest payments tax deductible and that's why they do it?

 

[Paul Kelly ICHYB]

What is the role of seller finance in a business acquisition?

To fund the sale?

Why do sellers agree to offer the buyers the capital they need for the deal?

It can move liability & debt from the owner to the buyer.

It means the seller can charge more for the beneficial terms.

 

[John Paulson]

What is the role of seller finance in a business acquisition?

To fund the sale?


It can move liability & debt from the owner to the buyer.

It means the seller can charge more for the beneficial terms.

Thanks. Could it be that, even if they have limited liability, if the seller has invested too much capital into the business, limited liability will only protect them so much. Could they take out some of their equity to fund the sale, so that they are better protected?

I was also under the impression that the following are other reasons for seller finance:

1. I know a famous example of someone who invested a lot of capital into a struggling business and was able to extract as much value as they could out of said business, which was Eddie Lambert, CEO of Sears Holdings, whose merger from K-Mart and Sears he oversaw, as he sold off the chain's brick and mortar stores to a REIT he controlled, but then leased back the stores to Sears via his REIT (in the US, as part of federal law, there is a 2 year period during which creditors may seek legal remedies against guilty parties for fraudulent conveyance, and then there are similar statutes of limitations under applicable state law, so Lambert stayed on as CEO of Sears long enough for those to expire), and sold product brands that Sears owned to other companies, such as a family of power tools to Black and Decker.
   
   I suppose that by acting as their creditor, Philip Day could be asset stripping the company while there's still liquidity in the business. I am not sure what the statute of limitations for fraudulent transfer is in the UK though.
2. Maybe the seller wants to maintain good PR, so they can pin the blame on the new management. Especially if they are responsible for maintaining employee pension benefits I guess, which is one of the liabilities they would otherwise be responsible for, had they not sold the business.
3. Given that you said the seller will have beneficial terms (for them) on the loan, maybe they are just seeking to get what they can while the company hasn't entered administration.

 

[Paul Kelly ICHYB]

If they sell the business, unless there are legal reason to chase (fraud, misrepresentation etc), they have no liability, but, for larger deals, you can get seller insurance.

 

[John Paulson]

If they sell the business, unless there are legal reason to chase (fraud, misrepresentation etc), they have no liability, but, for larger deals, you can get seller insurance.

Thanks. I guess that can be a reason to sell the business cheaply too, because the new owners will have to assume existing debt and liabilities.

 

[John Paulson]

Thanks. I guess that can be a reason to sell the business cheaply too, because the new owners will have to assume existing debt and liabilities.

Is withdrawing part of your invested capital to use as a seller loan for the buyer deemed appropriate or inappropriate?

 

[DontAsk]

Homework?

 

[John Paulson]

Homework?

No, I was just curious as to what the incentives for seller finance are. I know we have director's loans accounts on UK company books for e.g., but not sure what the restrictions are.

 

[WiseProcurement]

A seller may want to sell quickly for a variety of reasons, ill health, just fed up, found a better opportunity, for whatever reason, he just wants out and quick. So if someone is willing to purchase it at a fair price and pay him in instalments from the ongoing profits of the company, why wouldn’t he take the deal than just sell it for a fraction of the cost or close it down?

Most sellers will expect a decent initial payment but will be fine letting the business they’ve sold, finance the rest.

 

[pentel]

Most sellers will expect a decent initial payment but will be fine letting the business they’ve sold, finance the rest.

Providing there are suitable guarantees against tangible assets. The share of the sold company are not suitable tangible assets as the buyer can strip everything from the company and leave it worthless.