Will You Finance Part Of The Sale?
Maybe a better question is how much will you finance when selling your business? If you’re like most sellers, you’ll finance at least a portion of the sale when you sell your business If you’re unwilling to help with the financing, be prepared for a longer sales process and probably a lower price.
The good news is; you only have to offer short term financing when you sell your business (5-7 years is typical). The loan is amortized over a much longer period, so at the end of the loan term, there is still a sizeable amount of principal remaining.
But 5 years after selling your business, the new owner should be well established in his business and will be in a better position to obtain his own financing. He can make a single “balloon” payment to pay you off at that time.
How To Protect yourself when you sell your business?
Background check – Before you sell your business you must check out your buyer’s background. Your research should include, but not be limited to, credit reports, personal assets, work experience, and personal references.
Life insurance – You can have the buyer take out a life insurance policy with yourself as a beneficiary.
Additional Collateral – If the buyer has a personal residence with significant equity, commercial real estate or other investments, you can ask him to put them up as collateral.
Personal Guarantee – Just like a bank, you can require the buyer to personally guarantee the loan when you sell your business.
Sales Contract – Depending on the circumstances when you sell, you may want to restrict the new owner’s acquisitions, expansions and sale of assets until you are paid in full.
Price is not the only item that you will negotiate when selling a business. In fact, it may not even be the most important. The size of the down payment, interest rate and length of re-payment can all contribute to a very successful sale.
Once you’ve decided to sell your business, determine what kind of down payment you’ll require. Consider these expenses that you will face after selling:
·Taxes – sales tax, stock transfer tax, real estate stamp tax, and other taxes due at the time of the transaction.
Loans – you’ll need enough after-tax cash to pay off those business loans not assumed by your buyer.
Fees – appraiser, attorney and accountant’s fees, and in some cases broker’s commissions.
Regardless of the amount you need when you sell your business, you always want a substantial down payment so the buyer has a serious stake in the business. The more of his own money he has invested in the business, the less likely he’ll be to bail out on you if things get tough. Banks will require a 25-30% minimum down payment from a buyer to approve a loan. When you sell your business you should set your minimum down payment at the same level or higher.
What Role Will You Play After The Sale?
Unless your buyer has experience in your type of business, he’ll probably want you to stay on for the short-term, while he gets comfortable in his new business. Often, successfully selling your business requires that you commit to a training period.
Decide now what role you are willing to play after you sell your business. Will you stay involved on a daily basis for 30 days, 90 days, or not at all? Will you play the role of an outside consultant, and if so, for how long? Will you consult in person or only over the phone?
Unless you find that rare all-cash buyer, you’re going to be tied to your business to some extent after you sell until the buyer pays you off. Not only is it fair to ask the seller to advise and consult in the short-term, but it’s also in your best interest to be available to help the new owner while he learns the ropes. It might be the key that helps you sell your business faster and for more money.