Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
BANKING & FINANCE :: UPSIZE PRIMER
Hidden gems
Vendors, sellers and sale-leaseback deals can provide financing
by Andrew Tellijohn
LIKE MANY SMALL BUSINESSES, Laurie Brown?s Restore Products has been on a tight budget. She?s open and honest with her vendors about this and because of her stance she?s found that they?re often willing to be flexible with her on payment terms.
In fact, at least three times during the Minneapolis-based company?s growth cycle she?s approached various vendors that have provided financing she has used to keep her expansion on track.
?I really believe your vendors are your partners,? she says. ?It?s very important to treat them as such and they will help you out immensely.?
She is using a source of capital, vendor financing, that many say is often overlooked by small-business owners. Two others, seller financing and sale-leasebacks, are explored in this article as well.
?Always be willing to ask?
Restore Products provides easy and cost-effective means for customers to clean and maintain their investments without harming the environment. The cleaning products and patented refill stations are designed with user and global safety in mind.
Her company is growing, but is often still tight on cash. So early on when she was looking to design her refill station, she approached a vendor for assistance.
The financial backing Brown got from her vendors proves that businesses have more options available than banks and venture capitalists. And sometimes all it takes is the willingness to go out on a limb, Brown says, adding that you never know what you might learn.
?Always be willing to ask. What may seem like unreasonable requests often aren?t as unreasonable as you think for other parties,? she says. ?People believe in what we?re doing more than we thought they did. They want to be a part of the team.?
The move paid off. Vendors also have been willing to help finance a next-generation technological advance to her refill station and the creative work for the repackaging of her cleaning products.
One of those vendors, Minneapolis-based Mind Spark Creative Inc., was willing to do the company?s creative work during a re-branding for an equity stake in the business rather than accepting cash. It?s not a common way of doing business, but when Jim Davis, owner, has plenty of other work going, feels a kinship with the client and believes in the business, he?s willing to give it a shot.
?I?m open to working that way, definitely,? he says.
Davis now has an equity stake in two of the companies with which he does business. Both had unique products and, in Brown?s case, she has several patents that will keep a stranglehold on at least a portion of the market going forward.
?I kind of had the intuition to know her products and how she was going about it was pretty revolutionary,? Davis says. ?She?s got a lot of great ideas, she has a lot of patents. Knowing she has all that exclusive to her company, I thought it just makes sense.?
These deals are common with smaller businesses that don?t have the size to attract funding from Wall Street. Some banks specialize in underwriting vendor financing. Often manufacturers don?t have the money to build and hold many of their widgets, but if they can build them and sell them, providing terms for the buyer, with the backing of a bank it can work, says Rick Wall, CEO of St. Paul-based Highland Banks.
?The manufacturer knows that if you default on your loan for the purchase of the product they can take it back and they know what to do with it, unlike a third-party financier,? Wall says.
Vendor financing can also be used as a promotion or to provide more aggressive terms, much like when a dealership sells cars at zero percent interest. ?No bank is interested in a zero-interest loan,? Wall says.
On the down side, vendors don?t have low-cost funds like banks do, so whatever money they are using will cost them more. ?It gets reflected in the price,? he says.
Financial industry observers say vendor financing and two other lesser-utilized options for raising money? seller financing and sale-leaseback deals ? have traditionally been used more often when the economy is struggling. Seller and vendor deals were common, for example, during high interest rate periods in the 1980s when businesses had harder times securing bank loans and more traditional financing.
?In a down economy you are going to see the vendors and the sellers get more creative,? says Lloyd Kepple, a partner at Oppenheimer, Wolff & Donnelly law firm in Minneapolis. He adds that the current economy is in a wait-and-see mode. If it heads south banks could become more conservative and at that point many deals become a question of ?are the vendors and sellers willing to take the risk.?
Seller financing
Others in the financial services industry believe businesses that don?t at least explore such methods might be doing themselves a disservice. Chris Jones, vice president and business broker in the St. Paul office of Sunbelt Business Brokers, says business owners that don?t look into including at least some level of seller financing might be hurting their cause.
For example, when someone sells a business, a high percentage of the resulting proceeds can disappear through taxes, whereas a properly written promissory note can defer those taxes until the benefits are realized, Jones says.
With businesses doing between $1 million and $5 million in annual revenue, typically at least some level of seller financing is involved, as banks often won?t cover some discretionary items in an owner?s balance sheet. And seller financing looks good to buyers and bankers.
?It?s a vote of confidence from the seller that they believe in the future of the business,? Jones says.
Sunbelt typically represents sellers. Brokers typically will want to meet with a business owner?s team, including financ
Cannabis-based products have been increasingly available in Minnesota over the last six years. The opportunities in that space became even more prominent last year when the state legislature voted to become the 23rd state to legalize adult recreational use of marijuana for Minnesotans over 21.
When Super Bowl LII was played at U.S. Bank Stadium in February 2018, Alex Tittle didn’t play a down on the field, but he had more than three-years of impact on the experience.
Unemployment in Minnesota sits below 3 percent. Labor market participation is high. Airport traffic counts across the country are approaching and even surpassing pre-pandemic levels, so consumers are still spending money. Consumer confidence, reportedly spurred by the strong labor market, also seems at least cautiously on the rise.
