Are you looking to sell your business? If you are, then you might find that it’s not as simple as you thought. The recent financial crises have, among other things, affected the buying and selling of small businesses. The previous two-step model of transferring ownership and receiving money in exchange just doesn’t work anymore.
The biggest hurdle to the buying and selling of businesses is shortage of funds. The lending restrictions imposed by banks make it increasingly difficult for buyers to secure the capital to finance deals. To put it simply, no one walks with that kind of cash in their back pockets, and the banks aren’t helping either. So, the question is, how do you sell a business?
Owner-financed business deals may be an answer. If you are the seller of the business, you can provide a loan to the buyers to overcome their financial barriers and speed up the selling process. Here’s how it works: You receive a percentage of the selling price as down payment. Usually it may range from anywhere between 20 to 50 percent. The rest is paid by the buyer in installments with interest.
If you are aiming to finance the sale of your business yourself, here’s how to go about it.
1. Don’t lower your price
If you are facing a difficulty selling a business, lowering your price must be a last resort. And why lower the price? Your business is healthy, stable, and generating revenue. You deserve to get good money for it. Don’t leave money on the table. Instead, opt for an owner-financed sale. In fact, some sellers earn more on an owner-financed sale than a regular one due to interest.
2. Think like a lender
Most people do not find themselves in a position to lend a significant amount of money or assets to someone. Usually that’s left to banks and other lenders. But now, since the banks are shying away from it, you need to step up to the plate. You need to play the role of a lender. So it’s important to think and act like a lender.
For that, you need to consider what lenders do when you apply for a loan application. They run financial checks. The assess credit-worthiness. They only make investments with guaranteed returns. This is what you need to do. Demand financial and business records, business plans, bank references, credit reports, and whatever you need to evaluate the buyer’s financial state.
3. Seek help from professionals
Even if you have been careful every step of the way, it’s still better to seek help from professionals. Don’t get too carried away acting like a bank yourself. Despite all your best efforts, there can be a term, a clause, a finer detail that you might miss that a professional would not.
Hire an attorney early in the process. Discuss all the legal requirements of carrying out such a sale with them. Seek their help in framing contracts. Keep them involved in all stages of the sale. Hire a financial expert. Ensure their input in financial advice, loan terms, and insurance. Hire a tax professional. Make sure that you understand the tax advantages of such a venture.
Professionals can bring a lot to the table. Don’t leave yourself vulnerable to bigger losses just to save a little money.
4. Evaluate the risk
Before setting out for an owner-financed business sale, you must be aware of all the associated risks. Any financial investment may carry a significant amount of risk. Since it is a relatively long-term investment, you need to assess some of the difficulties that may spring up along the way.
For instance, a buyer may pay a healthy down payment but default on later installments. You may find that your business was not robust enough to sustain past a point. Or the buyer didn’t have enough experience to run a successful business. All these potential situations add to the risk factor of such an investment. But if you are aware of the risks beforehand, you can take steps to ensure none of these situations happen in real.
5. Secure a down payment
One way to eliminate as much risk as possible is to secure as big a down payment as possible. It’s simple. The amount of cash you’re able to secure upfront reduces the potential losses you may incur in case anything goes wrong. So focus all your energies in negotiating a good down payment.
Some owners waive down payment in order to secure the deal. If you do that, you’re inviting trouble. You’re exposing yourself to the risks associated with such an action. Ideally, the risks must be shared by both the buyer and seller. By securing a good chunk of the selling price as down payment, you can ensure that.
6. Advertise owner-financed sale as an option
When you set out to sell your business, you must state clearly that you will consider financing the sale as an option. Don’t resort to it when all else fails. This might sound counter-productive to you. but why shouldn’t you look for buyers that don’t require financing first?
You should, by all means. But think of how many good deals you’ll miss out on if you don’t include financing as an option in your selling terms. Think of the number of opportunities lost. And by the time you allow that as a possibility, all the good buyers would’ve passed.
Avoid scraping the bottom of the barrel and include owner-financing as an option early on in the sales process.
7. Settle on a healthy interest rates
Since you are taking on the risks of financing the deal, you deserve to earn interest on the repayment. During negotiations, settling on good interest rates must be as important as the down payment. Usually, the interest rates may range from 6 to 10 percent, but it depends on the nature of transaction.
However, you must also keep in mind that if the interest rates are higher than what the buyer can afford, there’s a risk that the buyer may default. Therefore, you must also consider the financial state of the buyer while determining the interest rates.