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5 KEY BENEFITS OF SELLER FINANCING

6/25/2014

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By Ryan Jorden
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!



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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 ryan@vralta.com or visit our website to learn more. We can also connect on Twitter and Google+.
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CONVERTING YOUR BUSINESS INTO A SOURCE OF RETIREMENT INCOME

6/2/2014

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Your business is a part of your legacy and a part of you. It’s very likely your business is the most valuable asset you own. There’s also a good chance you’ll want to pass it on to one or more members of your family. Succession planning, however, raises a number of difficult questions. What will become of your business when you retire and how does your business fit into your retirement plan? Even if you think you’re years away from slowing down, the need to address these questions is a pressing one – you need to put an exit strategy in place today.

Perhaps you intend to pass your business on or maybe you’d be content to sell to the highest bidder? If you’re not a sole proprietor, perhaps you’d like your interest to be bought by co-owner(s), partner(s), other shareholder(s) or certain key employees and use the sale proceeds to fund your retirement or create an estate?

There are countless factors to consider as you develop a strategy to leave your business and it’s essential you have a plan to convert the value of your business to cash when the time comes. There are a few basic ways of doing that.

Selling the business as a going concern to an outsider
While finding a potential buyer for a successful business is seldom difficult, finding the right buyer – that is, someone who either has enough cash or access to financing to be able to afford the purchase – is often more difficult.

Selling a business is not straight forward. It’s critical you work with experienced, professional advisors to weigh the myriad of tax, legal and accounting considerations.

Eventually you’ll have to address a number of questions;

- If your business is incorporated, will you sell your shares or the assets?

- Can you use your capital gains exemption?

- Will you have to remove non-active investments from your business in order to qualify for the capital gains exemption?

- Will you have to extract operating assets such as accounts receivable to reduce the purchase price?

- Are you willing to accept a promissory note or mortgage to finance the sale?

- What is your business actually worth?

Passing on your business
You may have relatives, co-owners or key employees who want to take over when you’re ready to retire. Facilitating this kind of transfer can be the most satisfying option, but it can also be the most complicated, particularly if other family members are excluded from the process. You’ll need to establish a value for your business and develop the confidence your successor(s) will be successful without you. This may require involving these individuals in ownership concerns sooner rather than later.

No matter how you choose to dispose of your business, it’s critical you make provisions for its disposition in your will. This is especially important if you plan on passing the business on to a family member. You’ll need to clearly delineate the means by which they will acquire the business. Will they purchase your share in it, with the proceeds going to your estate? Will they inherit ownership or a share in the business?

And what about other members of your family? Have you ensured the distribution of your estate is equitable? To avoid disputes, you’ll want to ensure everyone – including those who won’t be brought into the business – is taken care of in some way.

Managing the proceeds of your sale
Should you sell your business, you’ll likely find yourself with a large sum of money in hand. The question is, how can those proceeds be invested to balance the need to minimize future tax concerns and still deliver respectable returns? We can help you construct a properly diversified portfolio with the proceeds based on your objectives and tolerance for risk.

VR Business Brokers would like to thank Joel Bray CFP for his contribution as a Guest Blogger on our site. Joel is a financial planner and Division Director with Investors Group in Calgary, Alberta, where he has been named Financial Planner of the Year for 2011, 2012 and 2013 for the Calgary Centre Region. Joel can be reached at Joel.Bray@investorsgroup.com or (403) 229-0555.


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