GlobalBX

Know The Buyer
One of the top commandments for anyone looking to sell a small business is to recognize where your prospective buyers will come from, and what will motivate them to acquire your company.  Among all the things you can do to sweeten the deal and attract a wider selection of prospects, one of the best involves seller financing.  Many buyers will express an interest in your company and possess the skills to run it properly, but they may be financially constrained in doing so.  By understanding what motivates a buyer and showing the willingness to accommodate him or her, you will sell your business more quickly and for the price you want to achieve.

What Is Business Seller Financing?
At some point you will say to yourself, “I want to sell my business for X dollars.”  You will have arrived at this price by using a combination of methods—analyzing the sale price of comparable businesses for sale in your area and elsewhere, assessing the value of corporate assets, factoring in potential revenue growth, and so on.  Whether or not an interested party agrees to meet your price also depends on a number of factors, but one of the most vital is the question of business financing.  Very few people these days have enough money on hand to acquire a small business for cash.  Most have a down payment available and plan to finance the balance via the loan process.  Banks and credit unions provide most business loans, but current economic conditions has made consumer and business credit markets unbelievably tight.  One solution is through business seller financing, where the current owner acts as the lending institution.

Important Reasons to Offer Business Financing
Here are some of the factors that make seller-based financing worth considering:

• The buyer is willing to meet your price but has a shortfall between cash-on-hand and the total.
• The buyer has solid credit and knows the industry but is unable to acquire financing through traditional channels due to market influences.
• The seller wishes to lessen his or her tax liability by receiving the profits of the sale in installments rather than as a lump-sum payment.
• The seller is anxious to retain some control over the business in order to ensure its continued success during the ownership transition phase.

How Does Seller Financing Work?
As the owner of a small business, you will want to do as much checking as any bank in regard to the creditworthiness of the potential buyer.  Information worth examining includes net worth, the subject’s credit history—both personal and commercial—and the experience he or she has in the industry in which your business operates.  After all, you want to make sure the buyer will run the business successfully, thereby paying back your loan in a timely fashion.  Most sellers ask for a higher down payment than does a bank, primarily because the risk is higher.  The process is attractive to the buyer as well, since you will have a vested interest in their success.  After agreeing to the sales price and determining the interest rate and loan period—many sellers offer a seven- to ten-year payback—both parties sign a promissory note.  There are several ways to structure the payments, and some have different tax consequences to the note holder (seller) than others, so it always pays to consult a tax attorney before completing the paperwork.  Straight-line payments allow for the same amount to be paid every month until the balance is zero.  As with any type of installment loan, such as a home mortgage, most of the early payments go toward interest.  Rarely is there a provision for penalizing the buyer if he or she decides to pay the loan off early.  Any loss of interest by the seller is offset by the convenience of more quickly gaining the use of the full amount that is owed.  Another possibility is a performance-based schedule, where payments go up during times of higher-than-average net revenues, and decline when sales decline.  There is always a monthly base number, however, below which the payments never dip.

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