As a Dallas business broker, I get a front row seat to all of the emotions, fears, and misconceptions of business sellers about the sell process of selling a business. Every day sellers complain, lament, excuse, and hem and haw about why they do not want to even consider financing the sale of their business. I can categorize those hundreds of complaints into the following eight (sometimes legitimate but mostly illegitimate) complaints about seller financing. Here are some commons fears and myths when selling a business.
Fear #1: There’s No Guarantee That I’ll Get My Money
This is a legitimate fear in the abstract, but actually a low risk. Standard terms of a seller note (seller financing) include a personal guarantee by the buyer (in other words, they are pledging all their other assets), a stock pledge (in the case of default, the seller can foreclose on the stock of the new business through a simple procedure. Assuming that there is not a senior lender involved in the sale, a lien against all assets of the business, covenants governing how the business will be run during the term of the note, and a term life insurance or disability policy that would pay off the note in the event of death or disability of the buyer.
Fear #2: What if They Run the Business Into the Ground?
So what? If they do, you have all the protections described above, plus there are standard precautions that can be included in the deal to minimize that risk. First, make sure before you finalize the sale that your business is as turnkey as it should be; the new buyer should be able to step into your shoes and, without too much training, be able to replicate and build on your success. Make sure “you” are not the whole business.
Also, a good business broker makes sure that the buyer has relevant experience. Look at the business buyers resume and see what experience is relevant. I should also note that it is common to include the right of the seller to monitor the business progress through monthly or quarterly reports tailored to those aspects of business you know are key to success or failure. This gives you an opportunity to anticipate potential problems before they happen, and advise the buyer of how to adjust a few things. You and the buyer both want the business to thrive and grow; you are both invested in its success. If all else fails, you’ll be able to repossess the business, retool, and resell it.
Fear #3: How Do I Know That The Buyer Has the Experience Needed to Run MY Business?
You carefully screen prospective buyers until you find the right buyer, for the right company, at the right time. You’ll look for someone who has similar skills (even if in a different industry) that will be needed to maintain and enhance the business you have already built. A skilled business broker can help you walk through the process of identifying the type of ideal buyer you are looking for, and locate buyers who fit those criteria.
Fear #4: I’ve Heard All Kinds of Horror Stories About Seller Financing
There are all sort of horror stories that are not based on factual inquiry and rational thought. For every horror story that any (well-meaning, I’m sure) person gives you, asks for specifics, and then (if they can even give you any), use that story as a cautionary tale, instructive in teaching you how to do better. Approach the prospect of seller financing as you would with any other major decision in your business, by gaining information and structuring a deal that works for you.
Fear #5: I Don’t Want to Take My Business Back
That’s a fair enough concern in the abstract, but not enough to warrant lack of consideration of seller financing which could maximize your profit from your business in numerous ways, including obtaining a higher interest rate than most other investment opportunities, structuring of tax liability to avoid increased tax brackets, and allow for a higher sales price due to the difference between how a bank would view the business value, and how a buyer would view it. With careful planning, it’s unlikely you will even take your business back anyway, but there are certainly worse things in life than being able to repossess, rebuild, and resell a business a second time.
Fear #6: I Don’t Want to Be the Bank!
Why not? You are in a superior position than any bank to see the value of your business, and its potential for growth. Do you want a bank to collect the interest on a loan for purchasing your business, or do you want to bankroll that loan (without putting out any money) for an even higher interest rate?
Fear #7: I Have Existing Debt That I Need to Pay
There are a myriad of ways to structure debt payment into a business sales deal, including creating lease arrangements between you and the buyer for equipment or real estate. Enlist the help of a skilled business broker to formulate a plan to cover any debt elimination or reduction plan that will work for the business buyer.
Fear #8: What if the Buyer Wants to Make a Lot of Changes to the Company?
Hopefully the buyer will make changes to the company, changes that will make it even better and more profitable than at the time of sale. To ensure that they don’t make too many “wrong” changes, there are numerous precautions that can be taken. Find the right buyer in the first place, someone with the right experience to know how to operate the business. Make sure the buyer has sufficient training from you and your employees to optimize the transition time. Make sure you have the necessary covenants in place to establish boundaries of how the business can and cannot be run while you continue to hold the seller’s note.
For every reason and fear you might have about seller financing, I can provide you with the background information you need to make better decisions, expertise gained from selling my own business and brokering the sales of hundreds of other business in Texas. You may eventually not make the decision to sell your business using seller financing, but I guarantee you that it won’t be for lack of information! Contact us today.
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!