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 sends throughout the selling
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.
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.
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 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.
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
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 that failed.
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
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
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
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