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Googled due diligence mid-deal
A first deal
He had never bought a company. With a letter of intent signed and his lawyer telling him they needed to do diligence, he looked up the term online. The deal rolled forward on that footing until two weeks before closing, when it hit him: he would hand over all his money, the seller would pull all the money out of the business, and nothing would be left to cover the next payroll.
The payroll problem
He called the seller, Mark, and asked how he was supposed to make payroll. Mark asked whether he had a line of credit. He did not, and Mark told him the business would immediately fail. They agreed the deal could not happen, and Mark added that the buyer was an idiot. The buyer agreed.
The line of credit
Everyone had already spent a pile of money getting that far, so he asked Mark whether he could lend him the money. Mark gave him a line of credit on the very business he was selling, which kept it running after the sale closed. The company started doing well, and so did a couple of the buyer's other businesses, which left him with a lot of cash flow and no idea what to do with it.
Why does the seller's cash leave with them?
Small businesses are often sold cash-free and debt-free, which means the seller keeps the cash on the balance sheet and the buyer starts with what remains. Because of that, the two sides usually negotiate a target level of working capital, the money needed to cover payroll, inventory, and bills in the weeks after closing. If the business comes in below the target, the price is adjusted downward. A working capital adjustment is a standard feature of purchase agreements for private companies.
Why do sellers sometimes finance the buyer?
In sales of small businesses, seller financing is common: the seller accepts part of the price as a note that the buyer repays over time. It widens the pool of buyers who can close a deal, because the buyer needs less outside money up front. It also shows the seller's confidence that the business can carry the debt. A seller who finances a deal stays exposed to the company after closing, since the note is repaid from its cash flow.
How does a revolving credit line cover payroll?
A revolving line of credit gives a business a borrowing limit it can draw on and repay again and again. Companies use it to bridge the gap between paying employees and suppliers and collecting from customers. Banks commonly set the limit as a share of the company's receivables and inventory. Interest is charged only on the amount actually drawn.
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