Sell Your Business and Finance the Deal?
Getting a business sale closed probably means someone has to hold a note. Should it be you?
When it’s time to sell your business, you’re in for an education. Structuring the terms of a business sale can be complex and may require you (seller) to hold a note. Many people don’t realize that if the buyer is obtaining Small Business Administration (SBA) financing, the seller may be required by the bank to hold a seller note that is typically up to 10% of the purchase price. Why? It’s because the bank wants the seller to be invested in the deal as well – and in some cases and with some banks, it may be non-negotiable.
But what if the SBA isn’t involved? Should you offer to finance part of the deal for the buyer?
VR Business Broker, Tim Bellon weighs in, “At the basics of any transaction is a willing seller, willing buyer and the ability to pay. If the seller is willing to remove friction and finance at least some of the deal, it opens up the opportunity to attract more buyers and potentially set up a competitive bid situation.”
Bellon further lays out how to structure seller financing.
Find the right buyer
Being “the bank” for a buyer means you have to be selective. A good business broker will vet the buyer so that they won’t waste your time. Part of this due diligence process is pulling their credit report and making sure they have at least a 700 credit score or higher.
Demand proper capitalization
Providing seller financing usually means the buyer must put down at least 25% to 35% of the purchase price. If they can’t come up with the money, it should be a deal killer. Another option is to ask them to explore SBA financing.
File a UCC lien
A UCC lien on a business is a lien similar to a deed of trust on real estate. It will provide you with a recorded security interest in the assets you are selling. A buyer will not be able to get a bank loan on the business that will allow him to take his original down payment out of the company. It also keeps the buyer from selling the assets until the loan is paid off.
Secure additional collateral
If you are holding a note for the buyer, you have the right to ask for a trust deed on the buyer’s house. However, keep in mind that you may not be in the first position.
Set up automatic drafts
Your purchase contract should request that all loan payments be made by automatic bank debit. Both parties must sign a bank contract authorizing the bank to take money out of the buyer’s account and put it into yours. Bank debits get paid BEFORE ALL other company checks, including payroll or rent. If there are insufficient funds on the first day, you will have first shot at the funds deposited during the next two days. This will eliminate those dreaded calls from the buyer asking for another ten days grace on his loan payment because his rent is due.
Regular financial statement reviews
You should request (in the Asset Purchase Agreement) that the buyer is required to provide you with financial statements on the business regularly. As the seller, you will be in a good position to judge the performance of the business and know if there is a reason for concern. You can also review the balance sheet to be sure your collateral is being maintained at a sufficient level.
The rewards
Because the seller is assuming more risk, they should also expect more reward. One reward is a higher selling price. On average, a seller can obtain as much as 9% or more for his business if he finances 70% of the transaction (per VR business brokers data).
Another benefit is tax deferral. The Internal Revenue Services will allow portions of the taxes due from the sale of a business to be deferred into the future by the installment sale method. Non-recapture gains from the sale of capital assets can be deferred until the note holder (seller) receives principal payments in the future. This allows a seller to be taxed in future years when his tax bracket is probably going to be much lower. If a seller were to receive $500,000 in profits in the year he sold his business, he will find himself in the very highest income tax bracket – as high as 41% state and federal combined. If he received $50,000 per year over the next ten years, his combined rate would be 20% to 30%. The difference in tax brackets can mean a savings of up to $100,000 in taxes on a $500,000 gain.
Additionally, a seller note generally can bear interest at a higher rate than can be found on most other types of investments. Since a buyer can expect to pay as much as prime plus 2% to 2.5% for an equivalent SBA loan, a seller note at prime plus 1% or prime plus 2% is a very attractive alternative. At today’s prime, a seller note can be priced at 8% to 9% interest. The seller is earning 8% to 9% on his note before he pays the taxes from the sale of the business.
Consider this example:, if a seller received a $500,000 note with 9% interest, his interest payments alone would be $45,000 in the first year. However, if the seller received $500,000 cash when he sold the business, he would end up with just $300,000 after taxes. He then “would then have to find an investment that would pay him 15% interest to earn the same $45,000.
Put together, a 9% higher selling price, reduced tax bracket, and a high rate of interest paid on a before-tax promissory note, all translate into tens of thousands to hundreds of thousands of dollars in the seller’s pocket. Is it with the added risk that comes with it? Only the seller can answer. Be sure to talk to a qualified business broker to better understand how these options relate specifically to your business.
About Tim Bellon:
Tim Bellon, Owner VR Business Brokers: Tim was born and raised in North Dakota, and after the culmination of a 21+ year career in the U.S. Army, he and his wife Beth retired in Apollo Beach, FL. He earned his Bachelor’s Degree in History and Political Science from Concordia College, and a Master’s of Science in Defense Analysis from the Naval Postgraduate School.
Tim joined the VR Business Sales Team in 2012 as the owner and managing broker of an office serving the greater Tampa Bay, FL. During this time, he has focused on helping business owners realize their goals through selling, buying, or growing businesses. He also assists individuals, and companies looking to expand, in the identification and acquisition of businesses.
Tim is community-oriented and is a proud member of the following organizations; International Business Brokers Association (IBBA), Business Brokers of Florida (BBF), SouthShore Chamber of Commerce, Commercial Finance Association (CFA), American Legion, Disabled American Veterans (DAV), and the Knights of Columbus. Tim can be reached via email at TBellon@VRSouthShore.com.
Read More
What if You Already Have a Buyer for Your Business?
If a buyer finds you, do you still need a broker?
Normally, when an owner is thinking about selling their business, they will contact a business broker whose job is to advise, look for a qualified buyer, and help the parties negotiate the many possible pitfalls on the way to the closing table. It’s not an immediate process and can take months to make the perfect match. But what if a buyer finds you BEFORE you hire a broker?
In this scenario, it’s typically a willing family member, loyal employee, friendly competitor, or someone else that has a special connection with the business or the owner. This is usually great news for the seller because finding a buyer is often the most time consuming and tedious part of the entire process.
However, processing a business sale transaction is complicated and not like selling a home. It’s usually the most important transaction that a business owner will ever do in their lifetime. An entire career and the majority of the seller’s net worth is at stake. Don’t go it alone!
Who can help?
While it’s natural to ask your general business attorney for help, you will want to seek the professional guidance of someone who specifically does these types of transactions every day. Considering it’s likely the largest transaction of your lifetime, you can’t afford to miss any details that could haunt you forever. A business broker can guide you through the process and help increase the odds that you get the deal done, and oftentimes will help minimize your expenses. Tim Bellon with VR Business Brokers outlines the steps he uses to make sure the transaction goes smoothly.
Step 1. Get a broker “opinion of value”
Make sure you’re fair to yourself by knowing what your business is worth on the open market. A qualified business broker will take a look at your financial records and can let you know what similar businesses have sold for and what do expect.
Step 2. Draw up a purchase agreement
All purchase agreements are not the same. They will account for details such as the price, deal terms, contingencies, lease terms, real estate (if part of the deal), and many other potential items.
Step 3. Due diligence
Bellon starts the process off with having a due diligence kickoff meeting. He makes sure all parties understand the process involved and expected timelines. This part of the process may take a few weeks as details of the transaction are negotiated and accounted for. Among other intricacies, the buyer will likely be asked to provide a resume and a personal financial statement, while also working on securing financing.
If the buyer needs support with financing, a broker can recommend an SBA banker familiar with structuring similar deals. As part of his role, Bellon supports the buyer too and helps them with attorney and banker referrals while simultaneously hitting milestones to make sure funds are available at the time of closing.
The seller has their own set of challenges including making sure the landlord is aware of the pending transaction and is willing to sign over the subordination of lien rights, if the deal is being funded through SBA financing. Most sellers (or buyers) don’t realize that to satisfy SBA loan requirements,10 years needs to be left on the lease agreement. If this isn’t the case, the parties will have to negotiate with the landlord.
One particular sticking point, Bellon says, can be the examination of the financial records of the business. It is critical that the financial representation made by the seller is supported by the business’ financials. If there are excessive and questionable add backs (owner’s perks) made to the financial statements, the seller should expect the buyer to question at least some of these add backs.. Failure to do so may create questions and can lead to deal killing mistrust.
Step 4. Closing checklist
Bellon works from a proprietary “closing checklist” for the buyer and seller that accounts for details like:
- Deal timeline
- Contingencies
- Due Diligence Items
- Real estate/lease details
- Insurance details
- Personnel/employee details
Details like these require coordination with other professionals and need to be started weeks in advance of closing day. One example is in the case of life insurance. It can take a month or longer for a policy to take effect and funds won’t be available until the policy is bound.
Step 5. Closing day
Getting to the closing table is a challenge in itself. It’s the specific time and date chosen to hand over or transfer funds, get signatures, and literally give the keys to the new owner. It’s sometimes months of work that have to come together at precisely at this time. Any missed details at this point can not only postpone or kill the deal entirely, but can even result in legal action. To be sure there are no surprises, Bellon works with a third party closing attorney, to ensure that the closing documents are sent to each party ideally a week ahead of time.This closing attorney typically doesn’t represent either party and is only interested in making sure the deal is compliant with the law.
How much does it cost?
If you already have a buyer identified, working with a business broker can potentially save you money on professional fees as some states have professional associations, such as the Business Brokers of Florida, who have many of the forms needed to put together a deal that have been written by business attorneys. So in many cases, a large part of the work has already been done. The cost to complete the transaction can vary depending on the size and complexity of the deal, as well as how much buyer-seller negotiation happens. We recommend that both parties consult with a business attorney to get an estimate of what their own individual fees would be. The expense for the closing attorney is typically split 50/50, and it is not uncommon for the buyer to incur a few additional expenses. For complicated transactions like these, it is widely accepted as money well spent.
Having the confidence that the transaction was done right, can free your mind to focus on what’s next in life.
About Tim Bellon:
Tim Bellon, Owner VR Business Brokers: Tim was born and raised in North Dakota, and after the culmination of a 21+ year career in the U.S. Army, he and his wife Beth retired in Apollo Beach, FL. He earned his Bachelor’s Degree in History and Political Science from Concordia College, and a Master’s of Science in Defense Analysis from the Naval Postgraduate School.
Tim joined the VR Business Sales Team in 2012 as the owner and managing broker of an office serving the greater Tampa Bay, FL. During this time, he has focused on helping business owners realize their goals through selling, buying, or growing businesses. He also assists individuals, and companies looking to expand, in the identification and acquisition of businesses.
Tim is community-oriented and is a proud member of the following organizations; International Business Brokers Association (IBBA), Business Brokers of Florida (BBF), SouthShore Chamber of Commerce, Commercial Finance Association (CFA), American Legion, Disabled American Veterans (DAV), and the Knights of Columbus. Tim can be reached via email at TBellon@VRSouthShore.com.
Read More
Ready to Sell Your Business – Here are Some Things to Consider
After grappling with the idea of selling your business, you are finally ready to take the first step and make a call to a local business broker. Before you make that call, are you and your business prepared to deal with the scrutiny of a buyer and their advisory team? Here are some preliminary steps that you may want to take prior to making that phone call. These steps also happen to represent some of the common issues that may arise during the sale of a business.
- Books and records. In addition to the last 3 to 5 years of business tax returns, you will also need to be able to provide accountant prepared financials for the last 3 to 5 years, as well as the current year. Your business broker will need these documents in order to put together a valuation. Later on in the process, lender and buyers need to be able to understand the revenues and expenses of the business. If you have accountant prepared financials, you will increase the likelihood that your business will pre-qualify for bank financing, and more importantly will increase the likelihood that your business will sell.
- Fixed asset list. You will need a detailed list of the furniture, fixtures, and equipment that will transfer to the buyer of your business, along with a replacement value for each item on this list. Include VIN / serial numbers for any item with a value of $5,000 or more. If you have assets that are broken, not in use, etc., get them repaired or get rid of them.
- Current inventory level. When was the last time you took a physical inventory? Do you have excess and/or dead inventory? If so, you may want to consider getting rid of this excess or dead inventory.
- Real estate. If you own the real estate, and plan on selling with the business, you may want to consider having a real estate appraisal done.
- Lease. Do you have copies of the original executed lease, as well as any and all amendments? Have you ever, or have you recently, reviewed these documents?
- Contracts. Although these aren’t usually provided until later on in the process, have your reviewed the contracts your business has with customers, vendors, suppliers, etc. Are the contracts assignable/transferable.
- Administrative. Do you have an employee handbook and/or a policies and procedures manual? How about job descriptions for each employee? How about a business and/or marketing plan?
- Information Technology (IT). Is your IT infrastructure up to date? Do you have adequate security policies in place? Is there room to add more computers, phones, etc.? Do you own or have a license for the required software (not pirated copies)?
Now that you have reviewed these, and other pertinent matters within your business, go ahead and make that call. If you happen to reside in the greater Tampa Bay area, we would appreciate the opportunity to answer your questions and get you started with the process. Feel free to give us a call at 813-260-3127 or take a look at our website (www.vrsouthshore.com) where you can find additional information pertaining to selling your business.
Thanks for reading. I you enjoyed, please comment and or share.
Read More