Protecting The Seller Note When Selling a Business

Seller Note

You have pride in your business, in what you have created and built over the years. When you sell your business, you do so wanting to see your company survive and thrive. There are more reasons too for not wanting a buyer to run the business into the ground, especially if you as the seller are financing part of the purchase price.

Before proceeding here, I want you to get past the common knee-jerk reaction to the mere mention of the term “seller financing.”  Seller financing is a common piece of the package of a successful business sale and can provide substantial financial rewards with minimal risks to a seller. Before I can successfully convince you of the benefits of seller financing, however, I know that I need to address this common fear – what happens if the new buyer runs the company into the ground?

First, let’s put this fear into perspective. The buyer does not want your company to fail any more than you do. After all, they have spent their own money and time and provided you with a personal guarantee on any seller financing.  A buyer has nothing to gain by your company failing. There are a lot of easier, and more pleasant, ways to lose all of your money than a failed business venture. Las Vegas, comes to mind. Let’s be honest, if you carefully vet for the right buyer and your company is as good as you have represented to the buyer, you have already taken a lot of precautions against future failure of the company.

There are two important precautions that I recommend to add additional protection against your fear (real or imagined) that the buyer will run your business into the ground. There are probably 50 more ways, but one of the most important is post-sale monitoring of monthly or quarterly reports.

As a condition of seller financing, you can stipulate that you will be monitoring the company’s progress through monthly or quarterly reporting.  What type of reports are we talking about here? Well, let’s start with P&L (profit and loss), balance sheet, sales report, A/R aging(accounts receivable), just to name a few. You will know which reports will provide you with the best gauge on how the company is progressing. 

When I sold my janitorial business, for instance, the sales report I wanted to receive was the number of units cleaned in a day, week and/or month. Having access to this monthly monitoring showed me a great deal about the company in “real time” and how it was surviving after the sale. I also wanted to see A/R aging to make sure the new owner wasn’t sitting on a ticking time bomb of late or potentially unpaid invoices waiting to drag him down. In the janitorial business, as in a lot of other service businesses, just because you were doing the work didn’t mean you were actually getting paid for the work. Therefore, I wanted to make sure that the purchaser understood clearly that when “Client X” went past 60 days, well, they better pick up the phone asking for payment (since that particular client had probably “lost” the invoice).

From a seller’s standpoint, it is very important for you to go through this process of continuing to review various reports long after the sale of your business. After all, you can see the signs of your business struggling far sooner than anyone else, whether your employees or the new owner. You have experience seeing signs of stress on your company and averting disaster or wouldn’t have a thriving business to sell.

The buyer knows this too. He or she knows that you will know, better than anyone, the little signs that reflect a BIG problem is lurking just around the corner. Money aside, this is one of the main reasons the buyer is begging you to “carry” the note on the business. It is not just because the buyer doesn’t have to put as much money down. Instead, the buyer wants the satisfaction that you are looking over their shoulder and will help them along the way, particularly in the first year or two of the transition phase.

I’m not talking about you overstepping your bounds, telling them what color to paint the bathroom or how to arrange the furniture, but it is your job to help them understand little things that could potentially turn into major problems if left alone.  Remember, success for them is also success for your investment in financing the seller.

I recognize this precaution may not seem particularly attractive to you at the moment. In fact, I have had a fair number of sellers tell me that they do not want to spend time reading “those” reports once the business is sold. Why? To me, the reason is simple: They are burned out!  They simply don’t want to monitor the business after they sell it. That’s understandable, but remember that you are not continuing to run the business, you are mostly monitoring your new investment, your seller’s note.

Remember, I’m not suggesting you still swing by the office every week and pick up the reports yourself. I’m not saying you should be in constant contact with the buyer after the deal is done. However, with just a simple perusal of some equally simple report(s), you can:

  1. make sure things are going smoothly in your absence,
  2. spot a potential problem quickly,
  3. alert the new owner to the situation, and
  4. hopefully, (help them) avert it.

Just a little time in reviewing reports can satisfy you that things are going well and your investment is safe. You don’t get that opportunity with most other investment opportunities. When you invest in Google, you don’t have a secretary that will call you and tell you about the new venture that the crazy president has that will literally “kill” your investment. (No, because that would be insider trading.) Yet when you sell your business, you have tons of information about the business post-closing that will protect your investment. (And it’s ALL perfectly legal!)

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Scot Cockroft Business Broker
Hi, I’m Scot Cockroft.

When I founded Sigma Mergers and Acquisitions back in 2003, I had sold my business the year prior.

Now, that can sound good, but let me tell you, back in 2003, it was not easy to sell a business. Not that I’m saying in modern day times it’s easy to sell a business, but back then I interviewed broker after broker after broker, and no one was interested in actually seeing the value that my business brought to the table.

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Sigma is a the leading business broker in with Corporate offices in Dallas/Fort Worth with roots from 1984. Over 600 businesses sold in Dallas, Fort Worth, Texas, Oklahoma and across the South. Sigma provides full business brokerage services with NO upfront fees. We provide Market approach business valuations for business sales. Sigma is passionate about helping business owners achieve their goal of financial security. Contact us today for a free no obligation business valuation. We are here to help you achieve your goals.

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