Let’s start off by saying that there is “selling” your business and then there is “getting paid” for your business.  Right now business owners are having a hard time collecting money on a day to day basis and it’s no different when it comes to collecting on the sale of your business.   As I have said numerous times before it’s not the selling price of your business but your after-tax, cash collected, money you received, that defines a successful transaction.  I can tell you from my own personal experience that the sales price does not always, in honesty it rarely does, equate to the cash received.  I’m sorry to tell you that, I was told the same thing, and I thought my deal was different.  Well, I was wrong.  Rats!!

When you sell your business you will need to be prepared to finance some part of the deal.  Rarely does an all cash offer come to the table and, when it does, it comes at a steep discount to the sales price.  Typically the financing required is between the 25%-50% but these days it has become more like 75%-100%.

The interesting thing is that the higher the sales price, which usually means a better business, the better financing terms are available.  Too many business owners decide to sell their business while showing little to no profit so they can minimize their taxes.  Unfortunately the buyer has to use these same financials to get a bank loan and the banks turn them away.

Seller financing is usually through a promissory note that can be secured or unsecured.  The term secured might be a stretch since most times it’s against the business itself and if the buyer defaults on the note it’s usually because the business is doing poorly.  Sometimes you can secure it against another asset like a primary residence or equipment but just because it is secured doesn’t mean you will collect it in case of default.

In the current business climate bank financing options have significantly dried up.   They exist, but it needs to be a highly qualified buyer with strong personal assets, good credit and a business plan that works.   The typical financing opportunities are with banks and many are backed by the government with an SBA financing package.  I want to make clear that the SBA is not a bank and does not lend money.   When you hear that the government has approved more SBA money to stimulate the economy it means that they have increased the amount the government will guarantee, not what they will loan.   What the SBA does is to work with banks and provide a guarantee so if the business goes under, the government will repay the loan.  This “back up” by the government is to assist small business owners that would not otherwise not qualify for a loan.   It still comes down to each bank to decide if the buyer qualifies but the SBA does offer some additional coverage.

The fact is that 90% of all business transactions have some seller financing included in the deal and there are no guarantees that you will ever see that money.  It’s fairly obvious but when selling your business the goal is to minimize the amount required to finance and maximize the probability of receiving the debt repayment.  The way to maximize the buyers ability to qualify for a bank loan is two fold.  In your part of the deal you need to have a strong, clean set of company financials showing positive activity over the last 2 years.  You should start by showing an annual profit (I know you have to pay taxes but you get it back in the sale) for at least 2 years, but 3 is even better.    Remember that the sales price is often a multiplier of the net profit and lenders want to see that the business can afford the loan payment.   Showing your financials in a way to minimize your taxes is a short term fix but will have a lasting impression.

The other step to increase the chance of getting bank financing is to pre-qualify your buyer.  The terms of the deal are always negotiated up front but it wouldn’t be the first time that a buyer said they have “good credit” and at the end they don’t qualify.  Ask the buyer for a credit report and discuss what security they are willing to pledge against the note.  Remember that you will be behind the SBA in all secured assets and could be in the third to fourth position in so make sure there is enough room for your debt before you secure against it.

I want to leave you with one piece of advice that my lawyer gave me when I sold my business.  I asked him what percentage or how much of my sales price is typical to finance in the sale of a business.  He told me that I should only sell it if I was happy with the cash I received at the close of escrow and that any financing should be considered a bonus if received.  I didn’t like his answer but four years later he showed me that he was unfortunately right again.

This entry was posted on Tuesday, November 3rd, 2009 at 12:34 pm and is filed under Selling a Small Business, Sell Your Business, Professional Advice, Emotional Selling, Buy a Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.