Tips for Paying For Deal Costs
Most providers require retainers, periodic payments throughout the deal, and final payment at closing. Make sure you have a realistic budget on deal costs before your get started with your deal, and a good plan for how to pay for costs when due.
If you need extended payment terms from your deal team, make sure that is clearly communicated up front. Many providers are able to work with some sort of modified arrangements if it’s something they’ve agreed to before getting started, but being a surprise lender to a client can damage important relationships, and even lead to some providers terminating the relationship during the deal.
Below are a few options that may help with paying for deal costs. Each of these can have significant tax, legal, and other consequences, and should be carefully thought through with the advice of your professional team.
- Buyers – Financing Deal Costs Into a Loan: Some banks will allow a buyer to finance some or all of their deal costs as part of their loan by counting deal costs towards the buyer’s cash injection. Not all banks will allow this, and it can be dependent, in part, on the target business’ valuation.
- Provider Related Financing Options: Some providers have independent financing options available through payment processing companies or other credit sources that can help finance some or all of their fees. Typically these options will have high interest rates, and require underwriting.
- HELOC: Some clients find that the best option is to use a home equity line of credit. That can complicate bank financing and should be carefully thought through in advance.
- Retirement Accounts: Some retirement accounts can be invested into the transaction itself, and can be the source of a distribution or loan to finance deal costs. Carefully consider the tax and financial consequences with your professional advisors before using this option.
- Investor Funds: Some buyers choose to raise additional capital from investors to make sure they have enough funds for deal costs. Chat with your legal team to ensure securities compliance before engaging in raising additional capital from investors.
- Wait. Sometimes the best option is to wait until you have the liquid funds available to pay for the deal costs.
Added Tip For Buyers – Working Capital:
Running a business is expensive, and it’s usually a good plan to have more margin and more reserves than you think you’ll need, especially if this is your first deal. As a buyer, if deal costs are too much of a strain, it may not leave you with enough margin for reserves and working capital, and the better option may be to wait until you have enough margin to avoid that strain.
Talk To Your Team:
Get input from your team about your budget and priorities. They may have additional suggestions to help you pay for your deal and best achieve your priorities.
These resources are provided for informational purposes only, and are not legal advice. No attorney-client relationship is formed through this page. Please contact us if you’d like to inquire about our services.