4 - Structure & Negotiate The Sale
Financing: 9 Ways Protect Yourself
Check The Buyer's Background - It may sound obvious,
but when it comes to getting paid the money the buyer
owes you, the most important thing you can do is verify
that the buyer is qualified.
many sellers - in their rush to sell ASAP - ignore warning
signs the buyer send throughout the selling process.
the next section we will discuss Due Diligence. While
most people associate due diligence with the buyer investigating
the seller, in the next section we will talk about what
you can do to investigate the buyer's financial qualifications
in addition to checking the credit reports, personal assets,
work experience and personal references of the buyer you
should also be assessing the buyer on a personal and professional
be afraid to interview the prospect early on in the selling
process just as you would a job candidate.
the more qualified and prepared the buyer is, the more
understanding they are of you concerns. Conversely, the
buyer who is lying about past businesses successes or
their financial capabilities will balk at any attempt
to get to facts.
are some warning signs that buyers often give when they
are looking at your business. If more than 2 or 3 of these
apply to your buyer he may not be the type of person you
want to lend money to:
They delay or avoid any discussion of their financial
seem more interested in how much money you will take off
your asking price than they are in the actual operations
of the business.
expect/demand all sorts of financial information from
you up front without providing any proof they can actually
afford the business. In other words, they want the flow
of information to be all one way.
are very forthcoming with financial information about
themselves and it is bad (or inadequate to buy your business)
have bought or started more than one business in the past
are undercapitalized. As we stated previously, buyers
tend to underestimate how much money they will need. If
they have just enough cash to cover the down payment then
they are undercapitalized.
of experience. If they never ask any insightful questions
and never raise any concerns/objections it's probably
not because your business is perfect but because they
don't know what to ask.
Don't Give The Buyer A Legal Excuse To Not Pay You
- Some short sighted sellers try to hide certain negative
aspects about their business thinking that once the business
is sold they are off the hook. From a legal standpoint
that may not be the case.
be forthright with the buyer.
Sales Contract will includes a section for Representations
and Warranties - statements of fact about the business
the financial information provided to the buyer is correct
seller owns the assets listed in the sales agreement
tax returns have been filed and there are no taxes owed
unless specifically listed
liens and encumbrances have been listed
and many others statements can be part of the sales agreement.
course your lawyer will help you with this. Always be
honest with your lawyer about any problems with the business
- they can't protect you from legal problems if the don't
know the true state of the business.
making any promises or guarantees about the business'
future performance or the health of the industry. Once
you sell you can't control these things anyway.
Make Sure The Payment Terms Are Realistic - In our
discussion of Financing
Basics we discussed the need to limit the length
of the repayment period. It may be tempting to try to
squeeze every last dime out of the buyer and then shorten
the repayment period to 12-18 months. But if the result
is that the buyer can't meet his monthly payment obligations
then you haven't done yourself any favors.
the buyer will be paying himself and you out of the cash
the business generates. The financing plan has to be based
on realistic expectations about the business' performance
in the near future.
as buyers tend to underestimate how much cash it
will take to get into the business, they tend to overestimate
how quickly they can increase profits. In truth most businesses
experience lower sales and profits immediately after the
new owner takes over.
know your business better than anyone, so don't let an
overly optimistic buyer tempt you into a unrealistically
short payoff period - better to wait 5 years to receive
all you money and actually receive it than to set up a
plan where the buyer starts missing payments almost immediately.
insurance - You can have the buyer take out a life
insurance policy with yourself as beneficiary.
Acceleration Clause - An acceleration clause states
that if a buyer fails to make a payment on time, the entire
balance becomes due immediately.
Collateral - If the buyer has a personal residence
with significant equity, commercial real estate or other
investments, you should ask him to put them up as collateral.
Guarantee - Just like a bank, you can require the
buyer to personally guarantee the loan when you sell your
business. You should also get a personal guarantee from
the buyer's spouse. This prevents the seller from transferring
all their assets the spouse in order to avoid paying you.
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.
Escrow - If you are selling a corporation or LLC,
you and the buyer may agree that your corporate stock
of LLC certificates will be held by a third party - such
as an escrow agent - until the buyer has paid you in full.
If the buyer doesn't make good on his payments the escrow
agent would then return the stock certificates to you.
To Use Seller Financing To Negotiate A Better Deal