Important Questions to Ask When Financing a Business Sale
Selling a business that you have put many years of your life into is the monumental decision. The business you own is most likely your largest asset and is probably also your main source of income. This is why, when the time comes for you to exit, you need to put a lot of thought into how you want to structure your business sale.
Before you think about the terms and conditions of the sale, one of the first questions you need to ask is how much you are willing to accept. In other words, what is the lowest price you are willing to sell your business for?
In determining your bottom-line price, you need to be a realistic. Your price should be based on an independent valuation of the business, taking into account important factors such as your net cash flow, the value of your assets, and what comparable businesses are selling for in your area.
Once you know how much you are willing to take for your business, you will be ready to move quickly if you receive the right offer from a qualified buyer. Next, you should decide whether or not you are willing to finance the sale.
In an ideal world, a qualified buyer will show up with a cash payment for 100% of the purchase price for your business. Short of that, the buyer will be able to line up outside financing to make the purchase.
In the real world, however, it does not always work out this way. A business purchase is a major transaction that typically runs well into the six figures or more. Most people do not have that kind of money lying around, and banks are often very hesitant to lend money to a business buyer, especially if they have a relatively low down-payment, imperfect credit history, or other adverse factors.
To appeal to the widest pool of potential buyers, you might need to consider financing at least part of the business purchase yourself. If you go this direction, however, there are some important questions you need to consider:
Tax Consequences of Self-Financing: With a transaction of this size, there will be tax implications. And when you are considering the difference between receiving one large lump sum payment for the business and receiving gradual payments over a period of time (by self-financing), these two options are likely to affect your tax situation differently. Speak with a qualified professional to help determine how each option will impact your taxes (based on your specific circumstances).
What Interest Rate are you Willing to Accept: You will want to charge the buyer interest to help account for your risk of taking on the financing yourself. The interest rate you charge should be higher than the going rate that someone could get through a bank or a finance company, and it should be a rate that you can live with in exchange for not getting all of your money up front. This is another issue you should discuss with a professional. There are many factors to consider, and you do not want to charge too little or too much. Striking the right balance will be important for a successful self-financed sale.
Are you Willing to Stay Involved with the Business for a While: This is a key question, and one that you will need to answer affirmatively to even consider seller financing. If you are the financier and the business is the primary collateral for the loan, then you will have a vested interest in helping to ensure that the business remains viable. This usually means staying involved with the business at some level. It could be in a consulting role, it could be working part time, or it could be just acting as a client liaison. This all depends on what type of business you have, what the buyer wants, and other specific factors.
How Long do You Want to Be Involved: If you have determined that you are willing to stay involved with the business for a while, then you need to decide for how long. For example, a typical seller-financed business purchase involves a relatively short term, such as 5 to 7 years. At the end of the term, there is usually a large payment due to pay off the loan. This is referred to as a “balloon payment”. The idea is that by this time, the business will be on solid ground, the buyer will be comfortable running it on their own, and they should be able to obtain outside financing (to come up with the balloon payment). The question you need to answer is, are you willing to remain connected to your business for at least another five years or so?
Work with an Experienced Business Sale Professional: Seller financing is much riskier for business owners than having the buyer obtain outside financing. You need the business to stay profitable, and as such, you need to be much more careful about who you sell it to. To help ensure that your interests are fully protected with this type of transaction, it is best to work with a reputable business broker.
Business brokers, also known as business intermediaries, specialize in handling transactions like these. They have extensive knowledge of business sales and the common pitfalls that need to be avoided. An experienced business intermediary can help you navigate the complexities of the business sales process, and they can help you deal with important issues such as whether or not you are willing to self-finance.