Seller Financed Newspaper Transactions!! Spring, 2014"

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1 Seller Financed Newspaper Transactions!! Spring, 2014"

2 What is seller financing? The seller acts as a bank, and loans the funds to purchase the publication to the buyer. Similar to a contract for deed on real estate, again where the seller provides financing to the buyer.

3 Why is seller financing necessary? For many years, nearly every small publication sale (under a few million dollars) was financed by the seller. In the nineties, conventional banks started providing financing for all types of projects, including publishing companies. By 2000, it was fairly easy to obtain bank financing for publication acquisitions, and many transactions became all-cash sales.

4 In 2007, the economy, and banking industry, started to crumble. Nearly all conventional financing stopped. As the recession abated, publishing companies were still under major duress from digital advertising competition and most continued to lose revenues, particularly large papers. Conventional wisdom was (and still is) that newspapers and print publications are a sunset industry, causing banks to mostly abandon this segment. The lack of conventional financing created a need for alternative funding for newspaper sales, and seller financing is the most sensible alternative. The Cribb, Greene Publisher Confidence Survey Fall, 2013 reports that 60% of weekly publishing company buyers are looking for seller financing.

5 What does a seller financed transaction look like? Typically the buyer provides a cash down payment of 20% to 30% of the total purchase price. The seller then loans the buyer the balance, which is generally paid over five to 15 years, and includes interest of 5% to 6% per annum. Often part of the purchase price is paid to the seller as a non-compete agreement, which may be paid over a number of years and does not bear interest.

6 Seller Financed Newspaper Transaction Structure Total Purchase Price $1,000,000 Cash Down Payment $250,000 Balance $750,000 Non Compete $250,000 (paid over 10 years, zero interest, payments of $25,000 per year or $2,083 per month) Seller Financing $500,000 (paid over 10 years, 5% interest, payments of $63,639 per year or $5,303 per month) Annual Debt Service $88,639 Newspaper Financials Revenues of $1,000,000 with EBITDA of 20% or $200,000 x 5 purchase price of $1,000,000 Logic for buyer Buyer has $200,000 per year to pay $88,639 in debt service and non-compete, plus a return on the $250,000, plus some profit which is the buyer s financial motive to acquire the newspaper.

7 What are the disadvantages to the seller? The buyer may default and the seller doesn t get paid. The buyer may not have other funds to compensate the seller even when the buyer has personally guaranteed the balance. If there is a default, the seller s security is likely the publication they sold. The seller may be forced to take the paper back, and it may be damaged goods. The seller does not have the cash from the business sale to use for other purposes (buying another business, retirement home, etc.) If a buyer borrows the down payment, the seller may be behind the bank for his portion of the sale.

8 What are the advantages to the seller? Seller financing may be the only structure to sell a publication in the current market. A cash sale may not be possible. Seller financed sales typically bring higher prices than cash sales in the current market currently 3x to 4x EBITDA for cash; up to 5X EBITDA with seller financing. This may be a 25% price increase. Without an all-cash requirement, there are more qualified buyers to take interest in the publication. More buyers help create more competitive bidding.

9 What are the advantages to the seller? Seller financing provides an income stream to the seller, which some sellers prefer. Taxes are paid on an installment sale as payments are received. The interest on the sale balance is far higher than can be realized from investments (5% to 6% interest compared to 1% to 3%). There is more price-balance earning interest as opposed to a cash sale where taxes are paid up front, then the remainder is invested.

10 What are the disadvantages to the buyer? The seller is your partner, and has the right to request your financial information. There may be emotional, rather than professional, reactions to discussion during the course of the seller financed contract.

11 What are the advantages to the buyer? Typically, the interest rate charged by the seller, and terms and loan covenants, are more lenient. Sellers can be more willing to work with buyers through tough times than a conventional bank. Less paperwork like appraisals and other information that must be provided to banks due to bank regulations.

12 Keys to a solid seller financed sale The price and terms must be reasonable. A toohigh price or bad terms will set the buyer up to fail. If the buyer fails, the seller fails as well. Choose an experienced buyer with a good track record. A better operator will lower the chance of default. A well written and fair attorney-prepared sale contract that clearly spells out the obligations of both sides.

13 Summary Seller financing is a good tool, and can be the best approach to a sale in the current market. It will likely bring more buyers at a higher price than an all-cash approach. The seller will earn a higher interest rate on a larger portion of the selling price. Some sellers prefer an income stream over a period of years.

14 Summary Seller financing helps buyers to borrow funds at lower interest rates and with better terms. An experienced buyer with a good track record coupled with a sensible price and deal structure make the most solid transaction. A solid transaction with a qualified buyer allows the seller to

15 Enjoy life!