Seller Financing Pros and Cons
While seller financing can help push through a sale in today’s tight market, it doesn’t come without a hitch. There are a number of helpful tidbits to know when deciding whether this option is a good one for you or not.
Pros
· As the seller, you don’t have to leave money on the table, sitting by squirming while an eligible buyer has to pass you by for lack of funding sources.
· If you have faith that the new owner will succeed with the business it might be the right decision. You will get full paid back with interest.
· Your willingness to finance the sale gives you substantial bargaining power. It will often result in a substantially higher end price, plus, you will be paid interest until the loan is paid off.
· As long as the seller requires a substantial down payment, some of the risk is transferred to the buyer, minimizing your exposure.
Cons
· If your feel more apprehensive about the prospective buyer than you feel trusting, this may not be the right option for you. You risk not only the principal and interest on the loan, but may also incur additional costs required to collect the debt.
· Financing more than 2/3 of the sale can put the seller in a far too risky position.
· You may feel backed into a corner, with no other option than to finance the sale, but agreeing to more than you are comfortable with is not going to be to your advantage in the long run.
If you’ve decided that seller financing is for you, it will be to your advantage to include that in your marketing for the sale of your business. LittleBizTrader.com is an online business-for-sale marketplace where it has become evident that the listings offering seller financing get far more hits than those that don’t. BizChecker is an online tool that can be very helpful throughout this process.
Agreement For Sale of Business
Buying a business or selling one requires familiarity with certain legal documents, not least important of which is the business for sale contract or agreement. Variations of this document certainly exist, but they all contain the same basic elements. The purpose, in a nutshell, is to lay out in detail precisely what is being sold. It will spell out the price and exact terms that have been agreed to.
The standard contract will list the names of the buying and selling parties, define the purpose of the document, and define terms to avoid any potential confusion by either party. Some of the topics that may be included are: amount of deposit; employee retention and related details; treatment of existing liabilities; warranties of existing equipment; assets to be included in sale.
The more proficient you are in the language of the documents used in the exchange, the happier you are bound to be with the outcome. There will be fewer surprises, mysteries, and dissatisfactions. So, for this document here is a brief key to some of the most common and important terms:
Due Diligence. The process where the buyer has the opportunity to thoroughly investigate all documents offered up by the seller.
Cash flow. A statement offering a snapshot of the amount of money the company has at a given moment in time.
Letter of intent. A good faith letter usually preceding the contract that may include some legally binding provisions that will also appear in the contract.
Seller’s discretionary cash flow. Takes a look at how the seller chose to pay for items through the company, rather than personally, for greater tax deductions. Since the buyer may choose differently, determining this amount will help to more accurately evaluate the amount the business has actually earned.
Top 5 Mistakes when Buying a Small Business
Considering whether to buy a business or not? There are many things to consider when buying a business. Understanding the most common mistakes to avoid when buying a small business will help ensure that your own business will not flop.
Paying Too Much
You may spend too much on buying a business if you do not thoroughly investigate the business, its customers, its suppliers, its competition, and its industry before you buy. It is also important to understand why the business is being sold
Buying the Wrong Type of Business
In the urge to own a new business, some people buy a business that does not fit their particular set of skills. Is this business for you? What type of business is it? Does it interest you? Do you have the appropriate experience and education to make it grow? Don’t buy a flower shop when your experience is in electrical.
Not Using Experts
Consult with experts during the process of buying a business. At a bare minimum, you should enlist the aid of an attorney and a CPA. The attorney can prepare and review documents, help structure the deal and make you aware of legal and liability issues. The CPA can provide a financial analysis of the business and advise you on tax and accounting matters. You should also consider adding a professional business broker to your team. They can help with negotiating a price, and provide valuable information about the business industry, competition, and economic conditions.
Due Diligence
You should verify all the information about the business before buying, and recognize the importance of Due Diligence in the transaction. Due diligence is the time when you ascertain the financial health of the business. You can do some of the investigating yourself to save money, but do not cut too many corners – it may cost you in the long run.
Making Internal Changes Too Quickly
Huge internal changes can unnecessarily disrupt the business and lead to loss of valuable talent. You risk alienation long-time employees and customers. Unless the business is in bad financial condition and needs immediate action, it’s better to take some time to get to know the business, employees and customers before making huge changes. This is a perfect time to solicit suggestions from employees and customers.
Buying a business is a complicated and sometimes emotional process. By avoiding these costly mistakes, you can prevent turning your dream into a nightmare.