Seller Financing Basics

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Most small business sales are financed, at least in part, by the sellers themselves. Offering seller financing puts the seller in a stronger position to get a better price and a faster sale.

Buyers nearly always need seller financing. Their advisors strongly recommend it. Seller financing acts like a bond for performance to assure that the seller will live up to the promises made to the buyer during the sales process. Seller financing is seen by most buyers as an indication that the seller has faith in the future of the business.

Buyers can expect, however, that sellers who offer seller financing must also act a lot like a bank! A buyer can expect to be asked to secure the loan and sign a personal guaranty.

What is Seller Financing?

Sellers of small businesses usually allow the buyer to pay some of the purchase price of the business in the form of a promissory note. This is what is known as seller financing.

Seller financing is particularly common when the business is large enough to make a cash sale difficult for the buyer, but too small for the mid market venture capitalists. Seller financing is also common when the business, for any number of reasons, does not appeal to traditional lenders.

Why Would A Seller Offer Financing?

Sellers are nearly always reluctant to offer seller financing. Like all of us, they fear the unknown. Despite the advantages of playing bank, it is an uncomfortable role for them. They usually come around to seller financing only after some effort has been made to persuade them.

A seller's first encounter on this issue might be with the business supervisor. In many cases, but not all, the business supervisor will bring up the issue. Most business supervisors agree that sellers need to offer seller financing, but not all are willing to discuss the issue at the beginning of the listing. When the buyer is unknown, the seller's fear of seller financing is greatest. Some supervisors prefer to wait until the buyer prospect is known before suggesting the amount and terms of seller financing.

Offering seller financing up front, however, can attract buyers and speed up the business sale. This is the major issue that usually persuades a seller to offer some type of financing.

Seller financing is seen by buyer prospects as comforting proof that the seller is not afraid of the future of the business. Buyers are more likely to believe a seller's optimistic view of the business' future when seller financing is offered. Some buyers can't or won't look at businesses for sale unless seller financing is a possibility.

The more buyer prospects that look at a business, the better the chance a seller has to get an acceptable offer. A seller can also get a better price for a business that has financing in place. As in nearly all buying situations, buyers are often focused on achieving a purchase on terms that allow them to buy with as little 'cash in' as possible, even if the long run costs are higher.

Seller financing can also lead to a speedier sale. If the seller plays bank, then the deal gets done more quickly. Applying for a bank loan takes a long time for some buyers. A seller is more much likely to grant a loan request, approve a transaction, and close it as fast as the attorney can get the agreements prepared. There is also the possibility that the bankers will give the buyer negative feedback about the business, so that the buyer backs out.

A seller may also see tax advantages and profitability in seller financing, but these alone are not usually compelling reasons to offer seller financing. Capital gains from a small business sale can be reported in installments if seller financing is in place. This stretches out the capital gains tax into future years.

Why Should A Buyer Ask For Seller Financing?

Buying a business without seller financing is like buying a home without a home owner's warranty. The seller note is a bond for performance. This is the major reason a buyer ought to ask for seller financing.

The buyer is required to form a corporation and give the seller the rights to 'vote the stock' in case of seller note default. This allows the seller a speedier solution than foreclosure. If the terms of the seller note are not met, the seller can vote to require that payments be made and can even vote to replace management of the business. This threat is usually enough to guarantee seller note payments are not missed.

How Can Both Buyer and Seller Benefit?

Buyers are just looking for a fair chance to buy a business and a reasonable return on investment. They are usually fair about how they define what they need to receive as a return on investment for the business risks they are assuming.

Sellers are mostly just ordinary people who once bought or started a business and now want to sell it. They want to get the most they can, but they have learned to be practical. They are usually persuaded by fairness and reasonableness. If not that, then they are at least eventually persuaded by the reality of what's possible.

If you are a buyer, seller financing can offer you better terms and a friendlier lender. You will be able to buy the business quicker because you won't have to wait a month for the bank's loan committee to meet. There are no loan processing or guarantee fees and, usually, no invasive lender controls or audits.

If you are a seller, I would advise an early commitment to seller financing. It will save you a lot of time. You'll get a better price because you'll see more buyer prospects. Seller financing, properly understood and employed, can really benefit both buyer and seller.

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Selling a Declining Business

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It always amazes me when I meet with potential sellers whose businesses are in decline and they are surprised learn that buyers will not pay them based on their "glory days" of the past. Sometimes they're shocked to hear how little value their business may bring in the marketplace. The small business market is not ripe with turnaround experts. Buyers are mainly looking for stability, growth is a bonus.

Before we get into the meat of the article, you need to know that the best time to sell a business is when it is doing well, very well. It is far more difficult to generate any excitement when you bring a declining business to market. However; if you're faced with that predicament and must sell the business, here's what you need to know and consider:

• Can you resurrect it? If so, at what cost and how long will it take? Unless you have no choice, it may very well make sense to dedicate yourself for a year or so to bring the business back up. Doing so will clearly demonstrate to prospective buyers that the business can grow.
• Be completely honest with any prospective buyers - explain to them precisely why the business has declined no matter how difficult it may be for you.
• Spend some time to write down all of the reasons you believe contributed to the decline, what you would do differently if you could go back in time, and what can be done now to repair the damage. This will serve to be a very useful document to the buyer.
• Consider offering a longer transition/training period to the buyer although they may actually want you around for less time, but at least offer it.
• If you find a genuinely interested party, work to get a deal done somehow. Good buyers are hard to find. There are a ton of businesses for sale. If your business is not doing well, and you have an interested party, you may not come across another again.

Valuation Rules of Thumb

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If we are going to use a rule of thumb to value a business, some type of earnings multiplier makes the most sense to prospective buyers. It directly addresses the buyer's motive to make money - to achieve a return on investment.

Two areas of confusion are inappropriate comparisons to investment real estate and/or to stock market earnings multiples. Real estate is often priced at 8 to 10 times its net operating income. Stock market prices are often as much as, or even more than, 20 times earnings.

These two comparisons do not work for small businesses primarily because the risk of owning a small closely held, privately owned business is thought to be much higher than owning either real estate or publicly held stock. Running a small business is also a lot tougher than managing an office building or a stock portfolio.

But, even if we settle on an earnings multiplier, we are not even able to start the valuation process until we decide which earnings figure we are going to multiply. Is it last year's earnings? This year's? Next year's? Is it the last five year's earnings averaged? Is it the next five year's projected?

The next issue is our precise calculation of 'earnings.' Should it include or exclude the owner's pay and perks, interest expenses, depreciation and taxes? What about those one time expenses that may be on the books?

But, What's the Right Earnings Multiplier?

After we define which 'earnings' we should use, we still have to choose the right multiplier. How many times are we going to multiply earnings to get to a value of the business? Is it 1, 3, 5, 8, 10 or 20? Based upon what? Figured how? Most people can agree that this multiplier will vary based upon the risk of the business, but how can that be measured?

What about the various tangible and intangible asset values? Do we include the real estate, equipment, vehicles, inventory? Is there a separate value for a seller's agreement to consult with the new owner after the sale? What about non compete agreements? What about patents, franchises and other extraordinary intangibles? 

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Preparing to Sell Your Small Business During Challenging Times

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Business owners looking to sell their businesses often make some common errors when communicating with potential buyers, which can be a significant hindrance in successfully closing a deal. If you're ready to put your business on the market, knowing what buyers want and need will help you to make the most of your business sale and attract the best offers. In these trying economic times, this knowledge is essential. Many seller difficulties result from not being sufficiently aware of the following tricks of the trade:

Get Your Business in Shape

Potential buyers want to know that your business has good characteristics, such as location, a pleasing office space, high revenue stream, strong management, loyal client base, and a growing market base. If you can likewise convince your potential buyer that there are few risks incurred by buying your business, you're on the right track. That said, make sure your accounting books and financial statements are in order. If you're organized enough to present them with all the required information upfront, your potential buyer will feel more secure in knowing the business is well kept and offers great potential.

Make sure that you run your business in a steady manner well before considering a sale, without making any drastic changes that could result in revenue surprises. Nothing will make a buyer more hesitant than seeing an unexpected earnings reversal or irregular profitability that aligns with your for sale listing date.

Be Forthcoming

Knowledgeable buyers will conduct due diligence before making a business purchase, so don't hide any problems that your business has had, or currently faces. The buyer will eventually find out, I guarantee you. And when they uncover problems that you did not reveal upfront, they'll likely think you're hiding other things from them. And don't assume that you're in the clear if the sale has already been secured. If such problems are discovered after the purchase, you can be sued for fraud. So, be honest about the businesses risks and liabilities, as well as the real reason you're selling.

Establish a Business Transition Plan

Make sure the potential buyer can clearly visualize owning the business. If they think clients, day to day functions and even the business location prove unstable, they'll assume it's too much of a risk.

Make sure that transferable agreements commit clients to the business, and non compete agreements are recognized for key managers. It also doesn't hurt to present your business and marketing plan, were you to continue the business. While you should never promise the buyer a certain level of prospective sales or profit, presenting a plan can assure them you have the interests of the business in mind and are willing to offer your best prediction.

It is important, especially for those who own a retail business, that you have a lease that extends for a minimum of five years. If not, buyers will be hesitant to buy and financial institutions will think twice before giving out loans. A short lease signals that the business may prove unstable, so it is essential that you try to secure a transferable lease and lengthen the term, if possible.

Also, at the appropriate time, it's important to notify key management and employees that you will be selling the business. Being honest with them upfront will help to encourage them to stick around with a new owner. In turn, you can ensure the buyer that they will continue to have strong and experienced leadership on board right from the start.

Communicate With Buyers Early & Often

In an age where instant gratification is widespread - in everything from email to fast food - buyers expect immediate replies to their questions. In fact, 90% of initial sales inquiries are derived from online searches. If they can send a quick inquiry, they expect a quick response. Make sure you don't disappoint, as delaying will often kill deals, even if it's just a quick note to say: "I'll get back to you with that information next Tuesday."

Postponing your response often gives buyers the impression that you're stalling to come up with a satisfactory answer to hide a business inadequacy, even though that may not be the case. They want assurance that you can answer any of their questions honestly and succinctly.

Make sure to give buyers what they need to fully assess their purchase decision. If the potential buyer becomes frustrated with you, they'll likely think it's an early indication of how they'll become frustrated with the business itself. Individuals new to buying a business often do not know how/when to buy, what the business is worth, and have fear over making a mistake. Open communication and honesty will help put them at ease. Answer any questions, and build a relationship of trust.

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Is Your Business Worth Buying?

One of the toughest questions we face as small business owners is whether or not we are building a business worth buying. It is a fundamental question. We understand why its value is an important issue. We realize that the price paid will reflect, in some way, the benefits received. Buyers will trade their cash for perceived future benefits.

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We invest our most valuable resources of our time, our energy and our talent. We also invest our money, if not in the price paid, the down payment, the monthly payments or in the working capital, then in the money we lose from other missed opportunities. We are also investing today in anticipation of future benefits.

So, the tough question is: are we building something worth buying? The question is one that makes most of us uncomfortable. If we do have our business on the market, we are usually uncertain of its value. If it is not on the market, we are usually reluctant to face the issue at all.

Facing the Issue

 

The problem is that we invest our time and money in our business without enough thought. The result is well known. It is estimated that 80% of all small businesses fail within the first five years! For those of us who try to sell before we burn out, we can't believe the low offers we receive! It is less well known that most businesses offered for sale do not sell for anywhere near the listed price or within the anticipated time frame.

Our business is valuable only if it is truly profitable, creating a good life for its owner. This is as true for us as it is for any stranger who might buy our business. If our business isn't profitable, why should we come to work every day? Obviously, we shouldn't! How can we expect someone else to take our place? The answer, of course, is that we can't.

What we need to create is a business that functions exactly like a franchise prototype. A franchise prototype is a small business (a franchise) run like a big business (the franchisor). It is a 'turnkey' operation. Systems exist for each aspect of its operation. It runs independently of its owner. The key is the system. Just turn the key, and it runs by itself!

To accomplish this, we need to first ask ourselves, "What do we want to do better than anyone else so that customers will choose us over our competitors?" Bigger profits and the benefits that follow are the result of better systems: marketing systems, operating systems, administrative systems. In order to know what systems are needed to make our business more successful, we first have to know what we want to achieve.

We must have a vision of what we want and of what we need to do in our business in order to achieve it. This is a vision of what our business could be. Then, like big business, we have to design better systems to take us in the right direction to implement our vision.

We must spend our time designing and redesigning 'the way we do it' until we are profitable at it. Our employees will enjoy the satisfaction of high productivity. Our customers will delight in our effectiveness and efficiency of delivering what they want. We will make money, get some time off, and build a valuable business.

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Four Ways to Expand Your Business

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Today's challenging economy presents some unique opportunities for business expansion for those who have a unique set of circumstances. Growing your business is a constant challenge.

If you've been using the same business growth techniques for some time, here are a few fresh ideas, uniquely suited to current market conditions, which might stimulate some new thinking on how to expand your business.

Organic Growth

Organic growth is the most common form of small business expansion, and may be the way you've grown your business in the past.

In today's economy where consumers are increasingly turning to value over business loyalty, successful organic growth requires introspection. Businesses must examine their relationship with key customers to pinpoint why those customers are, or are not, happy with service levels. Today's economy may change how consumers perceive your product or service, as their needs regarding price, service levels, and other business factors may be influenced by their economic situation. Transforming this analysis into actionable business improvement initiatives involves hard work and forward thinking business strategies. It's about keeping customers happy, investing in the business, and selling and marketing aggressively.

Strengthening relationships with key customers and enhancing the value of your business's products or services is imperative if you want to grow organically.

Location Expansion

If your business has been based in a single location or region, now may be the time to set up shop in a second location or to expand your service area. This could involve opening a business in a nearby neighborhood or city, or making your services available to a broader geographic audience.

Creating a second location is much less expensive than starting a business from scratch, yet it exposes you to many new customers. As such, it can be a way to transform your existing operations into a much more profitable business. Expansion often enables you to benefit from economies of scale that were previously unavailable, providing additional profit enhancement.

Acquiring Competitors
 

It is likely that some of your competitors are struggling in this down economy, to the point where they are ready to pursue an exit opportunity. Rather than have them sell to a new competitor, you may be better off acquiring them and folding their operations into yours.

Since you know the ins and outs of your industry, and their business, you are less likely to overpay for it. You may also have good ideas on how to improve your competitor's operations, leveraging your expertise and experience. In addition, there may be economies of scale that can allow you to lower your raw materials costs or other business expenses.

Expanding Into a Related Market

Given everything that you've done right in your own business, it's very possible that you can apply those strengths to do well in a related field. When expanding into related markets, you can start the second business from scratch or acquire an existing business. Acquisitions tend to be faster, less expensive and less risky.

Expanding in a related market with complementary products or services will increase your potential customer base, and can likewise revitalize your sales cycle. The larger, more diverse customer base will also put your business in a more desirable position when you're looking to sell.

Getting Started With Business Expansion

Imagination and planning are the keys to starting a business expansion initiative. Contemplate each of the expansion methods discussed above and think through whether they are appropriate for your business.

Turn that contemplation into a list of possibilities. For example, which cities might you consider opening up in with another location? What competitors would you buy if you could get them for the right price? What related markets or complementary business lines might make sense for you to expand into?

Once you've identified some possible ways to expand, do a little market research to learn more about the expansion opportunity. For example, in fleshing out geographic expansion, you might travel to the other city and ask potential customers whether they'd be interested in doing business with you if you opened up in their neighborhood. Or, scope out the market for additional competitors that could make your expansion more, or less profitable.

In this market, it's important to keep your eyes and ears open for potential deals that may come down the road. The key is not to rest on your laurels. What you've accomplished to date may be impressive, but with a good expansion strategy in place, rest assured that the best is yet to come!

The recommendations of reading, reference materials or links mentioned, are for general informational purposes only. The materials are intended as a public service and are not a substitute for obtaining professional advice from a qualified firm, person or corporation. Consult the appropriate professional advisor for complete and up-to-the-minute information. These materials do not constitute the rendering of any legal or professional services.

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Financing Methods to Buy a Business

It's rare that a buyer has enough cash to buy a business outright, so traditionally they have relied on a variety of sources to finance the purchase. If you're in the market but faced with a lack of capital and no clear idea of where to start, consider the following financing options:

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Peer to Peer Lending Networks

If you're unable to access bank capital to finance a small business purchase, one alternative is to turn to peer to peer lending networks. These networks remove the involvement of traditional lending institutions, instead allowing lending transactions to take place directly between individuals.

Friends and Family

Borrowing money from the people you're closest to in life is probably the longest standing method of funding entrepreneurial endeavors. Many people are hesitant to borrow money from friends and family for fear of straining personal relationships, but if you make it a point to hold up your end of the deal under all circumstances and borrow only from individuals who are in a position to lend without risking their own financial health, it can serve as one of the most effective ways to fund a business.

Seller Financing

Today, more and more business for sale transactions are resting on a seller's willingness to finance at least part of a sale. In a deal that includes seller financing, the seller takes part of the purchase price in cash and the remainder in the form of a promissory note that the buyer will pay back with interest over a period of three to five years.

This has become essential in a time when buyers are having difficulty accessing funds through traditional methods, therefore naturally gravitating toward seller financed businesses to help offset some of the cost up front. Sellers who continue to say no to seller financing are finding it difficult to close a deal, and as more of them have realized this, there has in turn been an increase in seller financed businesses on the market.

If you're in the market for a small business it's important to be aware of these alternate funding options, but also know that in some cases it is still possible to borrow from a bank. Government stimulus and bank policy have been trying to promote ongoing small business lending, although many banks are still more conservative than they used to be about to whom and when they'll loan money. If you've inquired and are unable to secure a bank loan, though, taking advantage of one or more of these financing methods could still allow you to achieve the goal of being your own boss.

Today's business for sale marketplace is full of exciting opportunities that would allow you to take your destiny into your own hands, and with various options available there's no reason to let a shortage of traditional capital sources get in the way of your dreams.

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How to Successfully Buy a Business Online

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Thinking of turning your dream of starting a business into reality? Realizing the dream of starting a business, though, can be challenging without the right know how. Most small business buyers have never purchased a business before, and it can be difficult to know where to start. Going into business for yourself will undoubtedly require large amounts of commitment and drive to overcome fear of the unknown, but keeping four critical factors in mind can help ensure success when investing time and money into a small business.

Use Online Resources

The easiest way to learn about your options is to research what's available on an online business marketplace. Newspaper classifieds include a limited amount of the businesses for sale in one immediate area, while an online marketplace is more expansive. This kind of site offers a database full of available businesses in any area, which means that you can search locally or anywhere in the country if you are considering a change in location.

Be Savvy in Dealing with Sellers

Once you've located a business that interests you, contact the business owner. Make a list of any questions not answered, and be sure to get all the information you need from the seller. For example, it is a good idea to ask the reason why the business is being sold. Also, be sure to ask the seller to provide documentation for any numbers provided.

If the business seems like a good fit after receiving the answers, ask to view the business firsthand. If possible, visit the business without identifying yourself as a potential buyer to make sure you are satisfied with its appearance and location.

Don't be afraid to negotiate. Businesses generally sell for up to 25 percent of the seller's initial selling price, so there's no need to settle for numbers presented to you at the start without question.

Follow Through with Due Diligence

Once you've thoroughly communicated with a seller and all the information checks out, it can be tempting to want to speed up the process and sign a contract as quickly as possible. While the prospect of finally owning a business is exciting, there is still a need to work out contingencies. This process is known as "due diligence."

Although the numbers might sound good to you, it would be a good idea to bring in outside professionals such as business supervisor to validate them.

Embrace Lifestyle Change

Business owners often discover a new sense of freedom and purpose. They won't have to deal with a boss, their schedules - while less predictable - can be more flexible and a great sense of pride can come from seeing the business through to greatness.

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Business Selection for Aspiring Entrepreneurs

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Small business ownership is more popular than ever, but the road to owning a business that fits your personality and goals can be fraught with pitfalls if you're not fully prepared.

It's crucial not to underestimate the importance of choosing the right business. Imagine trying to run a marathon wearing running shoes that are three sizes too small. That's what it's like to operate the wrong business. Your efforts will likely be doomed from the start simply because you chose a business that doesn't match your interests.

As long as you keep in mind some key points when choosing a business, there's no reason to be discouraged. Thousands of aspiring business owners turn their entrepreneurial dreams into a reality every year. There are a variety of factors that go into the business selection process and, believe it or not, most of them are unrelated to the amount of capital you are able to invest in the business.

Choosing the Right Type of Business

The intangibles involved in selecting an appropriate industry and type of business can have an impact that lasts far beyond your first day on the job. Personal interest and passion are non negotiable elements in a successful business venture.

When the initial excitement of becoming a business owner wears off, you'll be left with the task of actually doing the work, day in and day out, for as long as you own the business. If the kind of work your business does isn't very interesting to you, you're setting yourself up for disappointment and frustration down the road.

A lot of new business owners begin the process by conducting an honest assessment of their interests. In fact, the most successful businesses often begin as a hobby which eventually inspires the business buyer to transition into ownership.

Another intangible has to do with the owner's skill set. Theoretically, it's possible to buy into a business in which you have absolutely no skills or experience. The problem is that the business may not be able to endure a lengthy learning curve. For example, if someone with no previous skills in the salon industry buys an existing hair salon with the intention of getting trained and certified along the way, a major issue would be how the business would survive while the owner learns the ropes. Would other employees fill the gaps, or is it a better idea to work alongside someone else before jumping into business ownership?

As you assess your interests, be realistic about your skill level. If your chosen field or industry requires training, factor it into your business plan from the start and make allowances to compensate for your gradual integration into daily operations.

Identifying the Right Business Opportunity

After you have determined the type of business that appeals to you and that you would be truly happy owning, the next step is to look for specific businesses that fit the bill in your price range. Unless you have a large amount of cash at your disposal, you will need to finance a good share of the purchase price, so a visit to your banker or other financing professional is a prerequisite to beginning your search. The goal should be to understand how much you can afford to pay for a business, factoring in the amount you may be able to borrow from a bank, friends and family, or the business seller.

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Is Now the Right Time to Buy a Business?

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Many recently laid off individuals are deciding to become small business entrepreneurs to gain more control over their future, and buying an existing business is top of mind for most of them. In a time of great economic uncertainty, however, many of these aspiring entrepreneurs are now dealing with a difficult decision: Should I buy a business now or wait until the economy turns around?

Here are 3 reasons why now is the great time to buy a business.

 1. Prices are Low

While many of the indicators that are used to track business valuations suggest that sellers can command a premium for good businesses in this market, there is at the same time strong evidence that there are quite a few distressed sellers out there who are willing to sell at a lower price than they might otherwise get in a booming economy.

For many businesses that are selling now, there is a need to sell. Those businesses that have decided not to sell can wait until the economy turns around, but a significant number of businesses for sale that are available right now have a higher sense of urgency.

For would be buyers, this means there are deals out there. If you wait until the economy improves and credit eases, you will miss this window of opportunity. Prices will rise during economic recovery and more buyers enter the market.

 2. Seller Financing Is Available

I know what you are thinking: "I'd love to buy a business, but it doesn't seem like I can borrow the money to do it." The answer to this conundrum is seller financing. As you might know, seller financing is when a seller, rather than a professional lender, assumes responsibility for a percentage of the buyer's investment.

Historically, seller financing typically comes into play when a buyer is unable to secure financing at the owner's selling price. The business owner then has two options: he can either lower the selling price, or work with the buyer and provide seller financing to overcome a potential deal breaker.

These days, many sellers are offering seller financing before they even meet a buyer. Sellers know that banks are not lending, so many are willing to finance the deal themselves. This means you can buy a business right now even if you cannot get bank financing.

Believe it or not, you can usually get a better rate from a seller than you can from a bank. You have considerably more leeway to negotiate the right down payment, the length of the loan, monthly payments and interest rates. Plus, if you pay the loan off early, many sellers also often accept a discounted balance.

3. There is No Time Like the Present

In fact, there are many reasons that businesses that start in a down economy do better than those that don't. Market share is up for grabs because buyers of products and services are scrutinizing expenses.
That gives new business owners a big opportunity. Furthermore, suppliers may be willing to offer great prices because, in this downturn, they are hungry for business. It's also a great time to bring on employees. There are many talented individuals looking for work now, and they may be available at more reasonable rates. That's not going to be the case after the economy turns around. Buyers who learn how to focus on revenue growth and to closely manage expenses during tough economic times can leverage those skills for greater business success as conditions improve.

Remember, when shopping for a business to buy, you are under no obligation to make an offer. So there's really no harm in browsing and, with a little luck, you may find your dream business at a great price.

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