Owners Unwilling to Provide Partial Financing When Selling a Business
In the last Issue #61, we discussed one of the most commonly encountered obstacles to the sale of a business – Business Acquisitions That Cannot Be Financed. This issue will discuss a related obstacle – Owners Unwilling to Provide Partial Financing.
“ The good news is that it doesn't cost much money to change your thinking. In fact, it can be done for free ” Robert Kiyosaki
Owners Unwilling to Provide Partial Financing When Selling a Business
As we learned in the last issue, prior to the credit crisis in September of 2008, it was possible for an owner to sell his business without participating in the financing.
In today’s economic climate, an owner should be prepared to provide some seller financing. These days, if a business owner demands an all-cash closing, the likelihood of a successful sale decreases significantly.
Minimize seller financing
From a seller standpoint, your goal should be to minimize the amount of financing to be provided. The key to being able to do so is to diminish other obstacles to a sale. It’s important to have realistic price expectations, to minimize customer concentration and to maintain current operating results that are on track with your prior year’s historical results. If the business is priced to high, you have customer concentration issues or your current year’s results are declining, the percentage of required seller financing can dramatically increase. In many instances, seller participation can be as low as 10% of the purchase price. However, much depends on the nature and specifics of the business itself.
The effect of "blue sky" (goodwill) on seller financing
Another factor that might affect the need for seller financing is the amount of “blue sky” (goodwill and intangible assets) in the business valuation. Under SBA rules, goodwill and intangible assets are the value of the business in excess of the fair market value of collateral assets. As of this writing, when goodwill/intangible assets are in excess of $500,000, the equity on that portion of the transaction has to be at least 25%. Because some lenders allow seller financing to be counted towards that 25%, you may be asked by the lender or the buyer to partially participate in that financing requirement.
The decision to provide partial seller financing can have numerous benefits:
1. In many instances, it can be the difference between successfully selling the business or not being able to get it done at all.
2. It instills confidence in the buyer when he knows the seller believes in the viability of the business.
3. The business will sell much more quickly than otherwise.
4. Studies show that owners who provide some seller financing achieve a higher multiple (sell the business for more) than those who demand all cash at closing.
5. With the interest rate you can negotiate, you will likely achieve a higher rate of return on the financing you provide vs. investing the funds elsewhere.
6. Because income deferral occurs as a result of providing seller financing, there may be some tax savings. Ask your tax advisor.
Perform your own due diligence on the buyer's qualifications
Obviously, if you are going to help buyers with partial seller financing, you want to feel good about the prospects of the buyers’ success. Just as buyers interview you to become comfortable with the business, you should interview buyers to enable you to reach your comfort level with their likelihood of success. You can request resumes, references, personal financial statements and check credit scores. You may want to ask for updated monthly, quarterly or annual financial statements for the length of your note. You might be able to negotiate security agreements and/or personal guarantees. However, your security will likely be subordinate to the lender’s security (if a lender is involved). When it comes to a seller note, you should definitely get your attorney involved.
