How Will a Buyer Finance a Transaction in Maryland?

One question we almost always received from our business sellers in Maryland is, “how will the buyer finance the transaction?”

Achim Neumann, President of A Neumann & Associates, a business brokerage in Maryland with offices in many states in the NE, said, “In times when financial resources are more limited, a financial structure becomes paramount in facilitating a deal” says.  “A few years ago, deals would usually consist of 75% cash to the seller and a 25% seller note. More and more, we have begun to see changes to this ratio.”

When looking closely at a financial acquisition in Maryland structure further, a lender would quite often contribute around 50% to a transaction amount – in the previously mentioned 75% cash. Additionally, where the industry type might be just one of the determining factors in defining the contributing amount, it has increasingly become THE determining factor.

“Businesses for sale in Maryland that are cash flow-strong and have fewer assets, such as service and distribution businesses, need to be matched with business buyers in Maryland that have a strong net worth position” says Neumann.  “These businesses tend to have less of an asset base that can be used as financing collateral for a lender.”

Most asset heavy businesses for sale in Maryland such as manufacturers—and to a certain degree retailers—have sufficient assets in place to allow a lender to find more collateral within the business, rather than looking at the buyer’s net worth.

In an environment punctuated by more stringent lending criteria, cash flow-based lending is increasingly in retreat and asset collateral, whether from the business/company itself or the investor, takes on a much more profound position.

Another mitigating factor is the SBA lending process. However, it is not the cure-all or a game changer. “Often, we are being approached by business buyers in Maryland who believe that the SBA pre-qualification of our engagements makes any acquisition possible, independent of the buyer’s finances” says Achim Neumann, “but nothing could be further from the truth.”

While SBA pre-approval is a very important measure for determining the interest level of banks and the underlying financial requirements for a business sale in Maryland, at the end of the day, it will not significantly divert from basic lending parameters.

“Our company has been fortunate during the last three years, that we have had no deals rejected on the basis of financing” says Achim Neumann. “It has always been possible to put deals together with happy parties. Sometimes, it did require a little bit more seller financing, but ultimately, the deal was closed.”