Step 4 - Structure & Negotiate The Sale

Seller Financing: 9 Ways Protect Yourself



1.) 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.

Too many sellers - in their rush to sell ASAP - ignore warning signs the buyer sends throughout the selling process.

In 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 as well.

But, 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 level.

Don't be afraid to interview the prospect early on in the selling process just as you would a job candidate.

Usually, the more qualified and prepared the buyer is, the more understanding they are of your concerns. Conversely, the buyer who is lying about past businesses successes or their financial capabilities will balk at any attempt to get to facts.

Here 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 qualifications.

*They seem more interested in how much money you will take off your asking price than they are in the actual operations of the business.

*They 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.

*They are very forthcoming with financial information about themselves and it is bad (or inadequate to buy your business)

*They have bought or started more than one business in the past that failed.

*They 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.

*Lack 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.


2.) 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.

Always be forthright with the buyer.

The Sales Contract will includes a section for Representations and Warranties - statements of fact about the business such as:

*All the financial information provided to the buyer is correct

*The seller owns the assets listed in the sales agreement

*All tax returns have been filed and there are no taxes owed unless specifically listed

*All liens and encumbrances have been listed

These and many others statements can be part of the sales agreement. Of 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.

Avoid 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.


3.) 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.

Remember, 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.

Just 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.

You 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.


4.)Life insurance - You can have the buyer take out a life insurance policy with yourself as beneficiary.


5.) Acceleration Clause - An acceleration clause states that if a buyer fails to make a payment on time, the entire balance becomes due immediately.


6.)Additional 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.


7.)Personal 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.


8.)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.


9.) 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.



NEXT: How To Use Seller Financing To Negotiate A Better Deal


The Six Steps To Selling Your Business
Step 1 - Preparation  Step 2 - Valuation   Step 3 - Finding Buyers
Step 4 - Structure The Sale  Step 5 - Due Diligence  Step 6 - Closing



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