Discarding Myths, Fairy Tales and Urban Legends About Seller financing when selling a business.
Have you heard the one about the traveling salesman who goes out to a bar for a nightcap and wakes up in his hotel room with stitches on his lower back – and his kidney missing? Such urban legends – others call them myths or fairy tales – are often told around campfires and are good for an after-hours laugh or two. But what about those business urban legends that can give you pause when entering into an otherwise sound business investment?
Let me guess. You are getting ready to sell your business and everyone is sharing their “advice” and horror stories about things going amiss. Some of the most prevalent of these are the seller-financing horror stories. Did you hear about my brother-in-law’s cousin’s friend who sold his business and carried the note and how he lost everything in the process, his business, his retirement, his wife, his dog. You can just hear the country singer crooning the sad tale. How much of this story is true and how much is urban legend? Are these seller-financing “horror stories” valuable, reliable, and trustworthy information upon which you can evaluate a very safe investment opportunity?
Believe me, as a business broker, I have heard hundreds of these stories and every time, without fail, the person telling the story cannot tell me who, what, when, where or how this particular “horror story” happened. I can, however, point to hundreds of successful seller financing arrangements in business sales, specific examples of not only the business seller getting paid, but getting a much better return on his investment than he would have gotten in the stock market or in many other investment opportunities.
Now, I am not saying that the horror stories that you are hearing about seller financing are 100% false. Sometimes seller financing arrangements fail, but you cannot view those situations in a vacuum. No matter how reliable the source of the horror story that is stopping you from considering seller financing, you cannot compare that situation to your own unless and until you are privy to all of the facts. Dozens upon dozens of factors go into why a seller-financed deal might have fallen through, hit the skids, or cost someone money rather than made them money. Here are some examples –
- Where did the buyer come from?
- What was his previous experience before taking over your company?
- How was the buyer interviewed and “vetted?”
- What was the buyer’s credit like?
- How closely did you examine the buyer’s credit?
- How was the loan secured?
- What monitoring protocols were put in place?
If even one of the above variables – let alone the 1,001 others that might derail a sale – were to be overlooked, the deal might get rocky. How much of the failure was caused by the buyer, and not contributed by the seller? Could the failure have been suspected much earlier? And could the seller have better protected themselves from that possibility?
There are so many ways to protect yourself as a seller and there are so many upsides to gain if you finance the sale of your business that you must look beyond the myths, fairy tales, urban legends and horror stories you’ve heard about seller financing to see the facts that lie beyond the fiction.
Risk is a fact of life. That was true when you started your business and is just as true when you sell it. Seller financing, however, can offer significantly controlled risk.
You have certainly heard horror stories of people losing their life savings in the stock market, haven’t you? You have heard the stories about Bernie Madoff’s $65 billion scam and R. Allen Stanford’s alleged $7.2 billion fraud with investor’s money. But when you say this is a rare situation, you’re actually right. This is not very common.
At the same time, when we look at the data, there really is not a high rate of seller-financed loans going into default, either. There aren’t official recording requirements for this type of data, but from our company’s research, we have found that when adequate protective measures are put in place, details we prepare for all of our clients, the default rate is actually very low because with every one of these measures acts to control the risk.
When we include all the sellers that haphazardly went about finding and monitoring their buyers, far more in number and percentage of those that finance their business versus those that invest in the stock market get paid their investment back – plus a healthy return.
Just as you approach everything else with wisdom and care, evaluate the option of seller financing, not from a position of FEAR, but of opportunity. Collect sound knowledge and understanding of how to protect this investment and I know you are likely to find strategic use of seller financing will be a tool to optimize the return on your business investment.
Either trying to sell a small business or a mid-size business using factual information is important tool when trying to sell a business. In Dallas Sigma Mergers & Acquisitions helps both small and midsize business owners sell their business.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
Feel free to reach out!