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If you are
like many business owners a large portion of your net worth is tied up in the
value of your business. When it comes
time to sell your business it will likely be one of the largest financial
decision you will ever make. Since such
a large portion of your wealth is connected to your business you clearly want
to get all cash for your business when you sell it, right?
Wrong.
Most business
owners will tell you they are not interested in financing the sale of their
business. They have a friend or family
member who sold their business and had to take it back. They don’t want any strings tied to them
after they sell. No one financed them
when they started their business so why should they finance someone else. The list is long and for the most part the
concerns are valid. However, when done
properly seller financing is often the difference between whether a business
sells at all and it can have an enormous effect on the sale price.
Seller Financing Can Increase
Your Net Price
Buyers will
often pay a premium for a seller financed business. Seller financing sends a strong signal to the
buyer that the seller believes in the future of the business and that the
investment is less risky. Buyers will
pay for what they perceive as less risk.
Seller
financing also creates interest earnings for the seller. For each $100,000 in seller financing
interest earnings will be $35,000! This is based on $100,00 on a 10 year
amortizations at 8% with a 5 year balloon.
Seller
financing can also help with tax deferment.
By taking a large amount of cash at closing a seller often puts
themselves in a higher tax bracket.
Taking the money over time can also allow the seller to find other
creative tax strategies and investments for the post closing income
stream. Talk to your accountant about
ideas on how to minimize your taxes.
Seller Financing Increases
Your Chances of Selling
Many
businesses never sell. One of the most
common reasons is the seller is so afraid of seller financing they demand
mostly cash. Buyers with enough cash to
buy their business meanwhile are leveraging their money on much larger, more
profitable businesses that are willing to seller finance.
Sellers and
buyers who pursue bank financing are often frustrated. Banks do not like to lend on business
acquisitions. When they rarely do they
often artificially cap the price with valuations and ratios that limit what it
can sell for. Banks also tend to
eliminate many good buyers with restrictive experience requirements. Seller financing on the other hand is
incredibly flexible and is limited only by what the parties can negotiate.
By offering
seller financing the seller makes their business accessible to a larger pool of
buyers versus waiting for that mythical buyer that is going to cash them
out. The few cash buyers that are out
there often want tremendous discounts that make them unappealing to sellers.
Protecting Yourself When
Seller Financing
If you decide
that seller financing is something you want to explore here are some ways to
protect yourself:
- Talk to multiple buyers. Carefully interview buyers and only
finance the buyer you will believe has the right experience and financial
wherewithal to continue the company’s success
- Demand a high enough down
payment. After investing a large
portion of their net worth, many months of note payments and lots of hard
work a buyer will not see failure as an option.
- Perform due diligence on
buyers. Financial statements,
credit reports and background checks are all tools for you to consider.
- Use a broker. If a buyer gets in trouble they will
often contact the broker to resell the business.
- Get a personal guarantee from the
buyer when possible.
- Have an attorney file a security
interest on the assets of the business.
This is your collateral.
- Require regular financial
statements from the buyer after closing.
At the end of
the day, seller financing works because it creates confidence in buyers that
what they are buying is a solid investment.
Buyers will often pay a premium for seller financing. On top of the interest earnings, tax
advantages and increased chance of selling, this can make seller financing a
very attractive and lucrative way to successfully sell your business.
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