One of the top reasons that business sellers don’t want to consider seller financing as part of the sale package of their business is the myth that with seller financing, there is no guarantee they will get their money back. Actually, there are five guarantees you will get paid, one of which will be discussed here and the rest in later articles.
First, let’s put the fear into its proper context. You aren’t going to stuff the sale proceeds from your business under your mattress or in a safe deposit box. At least I don’t think that is your plan. You are going to place that money into some other investment, somewhere other than the business that you have been running from day-to-day for the years you were creating and building it. Wherever you put your money (even if you opt for the mattress plan), there will be some level of risk. After all the house may catch on fire….. How about a personal guarantee on YOUR financial investment? Wouldn’t that be nice? Someone else personally guaranteeing that you will make a profit on your investment (the loan amount plus interest).
Unfortunately, your financial planner does not sign a personal guarantee ensuring your retirement funds will never lose value. Neither does your realtor sign a personal guarantee that you’ll never lose 10%, 20% or even 50% of your house’s value. Before you start thinking that personal guarantees are something out of the long-distant past, unavailable to protect your financial future, think again. When you sell your business, the business purchaser does exactly that. It is routine and expected that the business purchaser “sign their life away” to you with a personal guarantee of payment as a condition of seller financing. (Yes,to be fair on Mid-Market business sales we sometimes do not see a personal guarantee… We will discuss this later )
That’s right, on the sell of small businesses the purchaser agrees to personally guarantee the loan. Now, if you really stop to think about the fact that you are taking a piece of your retirement or investment future and placing it in someone’s hands, isn’t it somewhat comforting to know that the buyer has some skin in the game as well? Literally, a personal guarantee can be written in a way the buyer could lose everything if this venture doesn’t work. That is kind of like what you did when you started – or bought – this business.
The best way to approach the selling of your business is to think of it in terms no less important than you did when you started the business in the first place. Many sellers are so excited about the prospects of retirement, the good life, less stress, etc. that they lose sight of the finish line in the last few minutes of the marathon.
Take this one last opportunity, this one big push, and summon the energy to really, really think this all the way through. Think of how ingenious, gutsy, resourceful and downright crafty you were getting the financing to start your company. Now apply all that to selling your business and you could just see a bigger return than you imagined. Don’t settle for a 5% to 10% investment on this golden opportunity when you can reap up to 25%, 30% or even 40% instead.
Personal guarantee of the portion of the sale price that is seller financed is the first step towards letting you sleep better at night. There are four more guarantees also: (1) stock pledges; (2) a lien against all business assets; (3) covenants governing what the new owner (the buyer) can and cannot do in terms of operation of the company; and (4) term life or disability insurance covering those possible life events.
Seller financing of a portion of your business sale price is one of the best investments you can make in terms of transparency of its progress, and guarantees of getting paid. Get educated on all of its details, and include these five guarantees in the deal when you sell your business.