Once a business owner has decided to sell their business, they want to sell their business as quickly as possible. Even after they've partnered with a business broker and had their business appraised, it might be hard to find an interested buyer with enough money to write a check. Just like having a perfect house on the market, rarely does the buyer pay cash. By working with a business broker additional financing options appear. What if, to get the most out of selling your business, you helped finance its sale?
Providing Financing to Buyers
This may seem counter-intuitive: effectively giving a loan to someone to buy your business, but think about it: by financing the buyer as the business's seller, you gain the same benefit as lowering your price to buyers. The buyer doesn't need as much cash, but at the same time being able to recoup the difference as the buyer starts to pay back your loan. And of course, just like a loan from the bank, you get the interest on the note and your business broker will put security measures in place to make sure your loan is repaid in a timely fashion.
The Process of Seller Financing
When working with a business broker, the process of seller financing is broken down into many stages. It is incumbent upon your broker to check the credit history, net worth and industry experience of the buyer before recommending Seller Financing. Of course, the buyer should put enough money down so that they are at risk and vested in the purchase and the balance should be tied to a note secured by the assets of the business, with security filings (UCC's) and a security agreement spelling out your remedies if the buyer falls behind or defaults. These documents should be written by a transactional attorney who has a working knowledge of the Uniform Commercial Code.
Before putting your own money on the line in seller financing, your business broker should explore traditional loans for any qualified buyers. Established brokerages like George & Co will have strong connections with business lenders and banks on the national, region, and local level, and can help turn payment down the line into payment right now.
If traditional lending isn't available for the buyer, it's time to look at seller financing. It's important to have experts write up the contract and make sure both sides understand the loan amount, payment schedule, and penalties for default. As the seller, this legal purchase agreement is your investment that the buyer will repay the loan.
After the business is sold and you've provided transitional assistance and training, it's time to sit back and let the money come in. In most cases seller financing works like a traditional loan: monthly installments of payments are made with an interest rate until the loan is repaid in full. Many times, your broker will recommend a loan amortized over a longer period of time to make it more affordable to the buyer but will also insert a Balloon Payment after a few years.
In the event that the buyer cannot continue to pay the loan back and defaults, the process is the same for the business seller as it would be for a bank: the property is repossessed. Because all your assets including name, telephone number, furniture, fixtures, equipment, vehicles, etc. all have commercial UCC filings, they are yours until the loan is paid in full. From this stage it might make sense to put the company back up on the open market, sell the business to the current staff for the remainder of the loan, or sell off the company's assets to recoup any potential losses.
The issue of buyer defaulting often comes from the buyer going into the purchase lacking the assets, skills, and credit-worthiness to run the business and repay your loan. This is why it's so important to have experts to pre-screen your buyers. By having a brokerage screen buyers, you have serious buyers who have the funds to buy your business, and a plan for repayment if they need your assistance with seller financing. By having their business and credit history, a brokerage can help you avoid those who are unlikely to repay your loan or who may have a history of committing scams to business owners.
If you're looking to sell your business or buy a business in the New England area, contact George & Company. We'll work with you to find the right company or buyer. Either way, with over 35 years of experience in business brokerage, we have the business financing skills to get you the maximum dollars for your company.