Delay Payment to Future / Financing Changes at the Last Minute

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Identification

This is a tactic used at the end of a deal by a salesperson who is eager to sign the customer, or by a customer who does not have the cash and hopes to finance. Generally, we assume payment is due upon receipt of goods or completion of services. This is the default unless industry standard is different (e.g., a mortgage), or unless other financing terms apply. As a practical matter, sales teams should always have strategic relationships with financing organizations in place, if that is permitted in their business model. The delay in payment tactic is used to add value with essentially free financing, and is mentioned after both parties have invested time and effort in closing the deal. Given that money has a time value, any change in payment time must be adjusted accordingly with a reasonable interest rate. Delayed payment or financing changes may skew the deal. The time value of money, the notion that a dollar today is worth more than a dollar tomorrow simply because the passage of time creates risk of non-payment, forms a critical consideration and can alter other terms. If you need cash flow now, you will delay payment. Many individuals are in debt because of pushing off payments to a future time, one creditor at a time. The payday loan business works by preying on such people who need cash flow in the short term.

Example

Consider the following dialogue in a sale with a last-minute request: Negotiator 1: “We’ve spent three weeks and went through all the other terms and conditions, and I am happy we have an agreement on price.” Negotiator 2: “It was a pleasure.” Negotiator 1: “We can start making payments tomorrow.” Negotiator 2: “Payments? That changes everything. We are not a bank, that impacts our cost. We will charge interest. And you will have to give up your Favored Customer pricing guarantee.” Negotiator 1: “Well, I have to reconsider then.” Consider the following merger and acquisition deal: Acquirer: “We’ll give you a 2x revenue valuation.” Target: “Great. How is that structured?” Acquirer: “50% down, and 50% stock in our company.” Target: “Great. 50% cash at closing. What valuation on the stock, since you are not yet a publicly traded company?” Acquirer: “20% down, 80% earnout over three years.” Target (getting bad vibes): “How do you value your company?” Acquirer: “Fifty million.” Target: “We are in the same industry, that is a 5x revenue valuation. Will you give me a 5x revenue valuation?”

Solution

Be sure that you know the present value of the funds and discount the deal to present value. In stock swaps, valuation for publicly traded companies enjoys the ultimate valuation, the market; but privately held companies need more scrutiny. Haggle over the financing and know your tolerance for financial risk, especially in financed deals and earnouts. Know the financial condition of the organization requesting the financing. If you are the buyer, aggregate your debt and make sure it will work; the seller must know if they can manage the account receivable.

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