The time has come to sell your business and move on. If you haven't been through this process before, you may not be aware of just how difficult it is for a buyer to get financing from the banks. The money has to come from somewhere, so just how important is seller financing in the sale of your business? If you want to get fair market value and a reasonable return for all the work you've put in, then it's crucial. Here's what you need to know:
1. Providing access to funding allows a buyer to come up and meet an asking price
Very often an offer comes in lower than you were hoping for. And not because the buyer lacks motivation or doesn't see the value in your business, but that financing simply isn't available. Being able to bridge that gap will allow a buyer to step up and meet your asking price. The terms are negotiable and can adapt to meet the needs of both parties, resulting in a completed deal that works for everyone.
2. If the bank is involved, they'll be more confident lending with the seller attached
The ideal scenario from the perspective of most lenders is 1/3 down payment, 1/3 lender financing and 1/3 seller financing. Many concerns of the banks are resolved when the seller has a personal interest in ensuring the success of an incoming buyer. This three way arrangement also provides another set of eyes on the seller's financials, allowing a buyer to feel comfortable making their investment. The extra due diligence performed by the lending institution on the buyer will also help assist a seller in becoming comfortable with extending the necessary credit to complete the sale.
3. It creates a relationship of trust between the buyer and seller
No deal is completed without a necessary level of trust between those involved in the transaction. The parties are usually unknown to each other and must become comfortable in a fairly short period of time. When a seller is willing to put their money where their mouth is, it creates a unity of interest that breeds a powerful and lasting sense of trust. Additionally, this is also seen by the buyer as a seller's vote of confidence, not only in their own business but in the buyer's ability to be successful.
4. Protects both parties from misrespresentation and the unexpected
No seller financing is complete without a vendor take-back clause. This means that if the buyer doesn't meet the agreed upon payback schedule, they'll lose their deposit and the business will revert back to the seller. It's also a protection for the buyer and acts as a settling mechanism if there's been a gross misrepresentation of the business or something unexpected pops up like an undisclosed advertising contract. Since most sellers remain in the lease through a landlord assignment, they'll often tie a buyer's rent commitment to the seller financing. In other words, if they buyer doesn't pay the rent then it will enact the vendor take-back clause and protect the seller from action by the landlord. As rare as these occurrences are, a good advisor will insist that all parties are protected from these scenarios.
5. You will make more money on the sale of your business
It's important to remember that selling your business often results in writing a large check to Revenue Canada. If payment is deferred over a number of years, then you can take advantage of many tax strategies to maximize your return. Additionally, a profit is made by the seller on the interest charged to the buyer for the risk taken in extending this credit. Your financial planner and tax attorney can help you come up with the best plan for your situation. It's what you keep in your pocket that counts!
Ryan Jorden is the Managing Partner with VR Business Brokers in Calgary, Alberta, where he specializes in valuating and facilitating the sale of privately held businesses. You can reach him confidentially at firstname.lastname@example.org or visit our website to learn more. We can also connect on Twitter and Google+.