Case Study: Creative Financing in a Complex Business Acquisition

Acquiring a business is rarely a straightforward process, especially when the company for sale is a patchwork of divisions, each with its own quirks and history. In this case study, we’ll walk through the real-world journey of representing a buyer in the acquisition of a business division. A deal that required creative financing, meticulous financial recasting, and strategic negotiation. This story is for business buyers, sellers, attorneys, and anyone interested in how deals get done when the traditional path isn’t an option.

The Background: A Decade of Growth, One Division for Sale

Our client, the buyer, was interested in acquiring a specific division of a well-established business. The seller, who had built the company over more than a decade, was selling the division independently, without a broker and without the clean separation of financials that brokers typically insist upon. Over the years, the seller had added several divisions, but never separated their financials, assets, or operations. Now, only one division was on the table, while the rest of the business would remain with the seller. Of course, this wasn't discovered until after our client negotiated the price and brought us in for the drafting of a "simple" purchase agreement.

This setup immediately presented a challenge: how do you buy a piece of a business that isn’t truly separate from the whole? For buyers and their advisors, this is a common scenario in small business acquisitions, and it’s one that demands both creativity and attention to detail.

Due Diligence: Unraveling the Financial Web

The first step in any business acquisition is due diligence - digging into the numbers, the operations, and the risks. In this case, due diligence quickly revealed that the division for sale was deeply intertwined with the parent company. There were no standalone financial statements, no separate tax returns, and no clear asset lists for the division.

This is a common issue in small business acquisitions, especially when owners have grown their companies organically and managed everything under one umbrella. For buyers, this lack of separation can make it nearly impossible to secure traditional financing, such as an SBA 7a loan, which requires clear, verifiable financials for the entity being acquired.

The Financing Roadblock: Why SBA 7a Wasn’t an Option

The buyer’s initial plan was to use an SBA 7a loan for the acquisition. SBA 7a loans are a popular choice for business purchases because they offer favorable terms, low down payments, and competitive interest rates. However, these loans come with strict requirements:

• The business must have clean, verifiable financial statements and tax returns.

• The buyer must be able to demonstrate the historical performance of the specific entity being acquired.

• The transaction must be for a clearly defined business or division, with all assets and liabilities identified.

In our case, none of these requirements were met. The division’s financials were buried within the parent company’s records, and there were no separate tax returns. Without a clear financial picture, the deal would never pass SBA underwriting or qualify for conventional bank financing.

Recasting Financials: Creating a Clear Picture

To move forward, we had to roll up our sleeves and get to work untangling the division’s finances. This process, known as recasting, involved:

• Reviewing three years of the parent company’s financial statements.

• Identifying all revenue, expenses, and assets attributable to the division for sale.

• Separating out shared costs and allocating them appropriately.

• Creating pro forma financial statements that reflected the standalone operations of the division.

This was a painstaking process, requiring close collaboration with the seller, the buyer, and their respective accountants. The goal was to produce a set of financials that would give the buyer-and any potential lender-a realistic view of the division’s performance and value.

Recasting financials is a critical step in many business acquisitions, especially when divisions or product lines are being sold. It allows buyers to assess the true earning power of what they’re buying and helps sellers justify their asking price.

Asset Allocation: Dividing What’s Sold and What Stays

With the financials recast, the next challenge was to identify which assets belonged to the division and which would remain with the parent company. This included:

• Physical assets (equipment, inventory, vehicles)

• Intellectual property (trademarks, customer lists, proprietary processes)

• Contracts and supplier relationships

Every item had to be reviewed and assigned to either the division being sold or the parent company. This process required detailed asset schedules, legal agreements, and sometimes, tough negotiations. The goal was to ensure that the buyer received everything needed to operate the division independently, while the seller retained what was necessary for the ongoing business.

The Creative Solution: Structuring Seller Financing

With the financial and asset hurdles cleared, we faced the final-and perhaps most critical-challenge: how to finance the deal. Since SBA 7a and conventional loans were off the table, we turned to creative financing, specifically seller financing.

Seller financing is when the seller acts as the lender, allowing the buyer to pay a portion of the purchase price upfront and the rest over time, often with interest. This approach can be a win-win:

• The buyer can acquire the business with less cash upfront and without relying on bank financing.

• The seller receives ongoing payments, often with interest, and may benefit from tax advantages.

In our case, we negotiated a structure where the buyer would put down 30% of the purchase price, with the remaining 70% paid over three years at a 6% interest rate. This arrangement provided the seller with a significant upfront payment and a reliable income stream, while giving the buyer time to integrate the division and generate cash flow.

Negotiating the Deal: Building Trust and Aligning Interests

Seller financing requires a high degree of trust between buyer and seller. The seller is, in effect, betting on the buyer’s ability to run the business successfully and make the payments. To build that trust, we focused on:

• Transparent communication about the buyer’s plans and capabilities.

• Detailed legal agreements outlining payment terms, security interests, and remedies in case of default.

• Ongoing support from the seller during the transition period.

We also structured the deal to align interests. For example, the seller retained a security interest in the assets until the note was paid in full, and there were provisions for accelerated payments if the buyer sold the division or achieved certain financial milestones.

Overcoming Challenges: Lessons from the Front Lines

Every business acquisition presents unique challenges, and this deal was no exception. Some of the key lessons learned include:

• Start with the end in mind: Before diving into negotiations, clarify what is being bought and sold, and what each party needs to achieve their goals.

• Recasting is essential: When buying a division, invest the time to recast financials and create a clear, standalone picture of the business.

• Asset allocation matters: Be meticulous in identifying which assets transfer and which stay behind. This prevents disputes and ensures a smooth transition.

• Creative financing unlocks deals: When traditional financing isn’t an option, seller financing or other creative structures can bridge the gap and get the deal done.

• Trust and transparency are key: Seller financing only works when both parties trust each other and communicate openly.

The Outcome: A Win-Win Transition

Thanks to careful planning, creative structuring, and open communication, the deal closed successfully. The buyer acquired the division with manageable upfront costs and a clear path to ownership. The seller received a significant down payment and ongoing income, while retaining the rest of the business.

This case study demonstrates that even when a business acquisition seems impossible-due to messy financials, intertwined assets, or financing hurdles-there are always solutions for those willing to think creatively and work collaboratively.

Takeaways for Buyers, Sellers, and Advisors

Business acquisitions are rarely simple, especially when divisions are involved and traditional financing falls short. But with the right team, a willingness to dig into the details, and a creative approach to deal structure, even the most complex transactions can succeed.

For buyers, the key is to be flexible and open to alternative financing options. For sellers, preparing clean financials and being willing to consider seller financing can open the door to more buyers and better deals. And for advisors-attorneys, accountants, and brokers-the role is to guide clients through the maze, ensuring that every detail is addressed and every risk is managed.

Frequently Asked Questions: Business Acquisition Creative Financing

What is seller financing in a business acquisition? Seller financing is when the seller allows the buyer to pay part of the purchase price over time, often with interest, instead of requiring full payment at closing. This can make deals possible when bank financing isn’t available.

Why do SBA 7a loans require clean financials? SBA 7a loans are backed by the government and require clear, verifiable financial statements for the business being acquired. This ensures the lender-and the SBA-can accurately assess the risk and performance of the business.

How do you recast financials for a business division? Recasting involves reviewing historical financials, separating out revenues, expenses, and assets related to the division, and creating pro forma statements that reflect the division as a standalone entity.

What are the risks of seller financing?T he main risk for the seller is that the buyer may default on payments. This risk can be mitigated with security interests, personal guarantees, and detailed legal agreements.

Can creative financing work for any business acquisition?Creative financing is most useful when traditional loans aren’t available, such as when financials are messy or the business is asset-light. Every deal is unique, and the right structure depends on the needs and goals of both parties.

Final Thoughts: The Power of Creative Deal-Making

Business acquisition, creative financing, seller financing, and recasting financials aren’t just buzzwords-they’re the tools that make deals possible when the road gets rough. Whether you’re a buyer, seller, or advisor, embracing creativity and collaboration can turn obstacles into opportunities and pave the way for successful business transitions.

If you’re considering buying or selling a business division, or facing challenges with financing or financial separation, reach out to experienced business acquisition attorneys and advisors. With the right guidance and a willingness to think outside the box, you can achieve your goals-even when the path is anything but straightforward.

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Howard Law is a business, regulatory and M&A law firm in the greater Charlotte, North Carolina area, with additional services in M&A advisory and business brokerage. Howard Law is a law firm based in the greater Charlotte, North Carolina area focused on business law, corporate law, regulatory law, mergers & acquisitions, M&A advisor and business brokerage. Handling all business matters from incorporation to acquisition as well as a comprehensive understanding in assisting through mergers and acquisition. The choice of a lawyer is an important decision and should not be based solely on advertisements. The information on this website is for general and informational purposes only and should not be interpreted to indicate a certain result will occur in your specific legal situation. Information on this website is not legal advice and does not create an attorney-client relationship. You should consult an attorney for advice regarding your individual situation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.