Why Use Seller Financing to Buy a Business

Buying a Business?

Here are 5 questions to consider finding answers to when buying a business through seller financing.

5 Questions to consider when buying a business through seller financing:

1. What is The Meaning of Seller Financing?

2. How Does Seller Financing Work?

3. What are The Benefits for Buyers?

4. What are The Benefits for Sellers?

5. Is Seller Financing Safe?

In 2018, the number of businesses bought and sold passed the 10,000 marks.

If you're looking for a business to buy you have several options. 

One of those options is using seller financing to buy a business. It means that even if you don't have enough money to pay the full price upfront, you can still buy the business you want. 

Read on as we take a look at the ins and outs of using seller financing.

What Is Seller Financing?

Put simply, seller financing is when there seller finances some of the cost of buying the business.

It's a bit like the buyer taking out a loan to fund part of the purchase, but the loan is from the seller rather than a financial institution. In effect, the seller is loaning the buyer some of the money to buy the business and will receive this money back with interest over an agreed period.

How Does It Work? 

First, both parties have to agree to use seller financing for a portion of the sale of the business.

The buyer will usually have to provide financial information to the seller to prove that they can afford the loan repayments. The seller may also ask to see evidence that the buyer has the business experience to keep the business afloat while paying down the loan. This could be in the form of a business plan. 

The seller will probably also look at the buyer's credit history. If any of the information provided gives the seller cause for concern, they are within their rights to refuse the sale. This is similar to the process that you would go through when taking out a loan with a bank, for example.

Once the seller approves the buyer, a contract will be drawn up laying out the amount of the loan, the interest rate, the repayment schedule, and any collateral requirements. It is also very likely that there will be a clause stating that if the buyer does not keep up repayments on the loan, they will forfeit ownership of the business. 

Benefits for the Buyer

The most obvious benefit for the buyer is that it allows them to buy a business without needing to have the full asking price available to pay upfront. 

With less money paid out upfront, and manageable monthly payments, this gives the new business owner more leeway with their cash flow which can then be used to help the business grow. In addition, seller financing usually leads to a quicker sale as there are fewer hoops to jump through than there are with the banks.

It may also be the case that a buyer is more likely to get financing by this method, as sellers may not have such strict financial requirements as financial institutions do. Sellers may offer more favorable rates of interest than the banks can offer, too. 

Also, the seller has a vested interest in seeing the business succeed so that they receive all of the money and interest that they are owed. This means that are more likely to be open to offering advice and guidance to the new owner about how to help the business grow.

Benefits for the Seller

This all sounds great for the buyer, but why would a seller want to lend someone money to buy their own business?

Well, for a start, it opens you up to far more buyers. Buyers who may have the perfect experience to make your business success may not meet the requirements for a bank loan. Offering seller financing gives you a much wider choice of buyers so that you can find the right fit.

Another major benefit is that you're taking an interest in the amount that you lend. That means that your money is going to work for you. You may also be able to sell at a higher price and much more quickly than you could otherwise.

There are also tax benefits. Instead of paying tax on the full sale price of your business, your gains become incremental allowing you to spread your tax burden out over a much longer period. 

Is Seller Financing Safe?

There are risks involved in seller financing, but the vast majority of these are on the side of the seller. 

The biggest risk is that the buyer is unable to keep up repayments on the loan. The seller must then begin the process of taking back ownership of their business or trying to recover any outstanding payments. It may be the case that the business you repossess is no longer worth as much as when you sold it.

The seller also receives less money upfront, so if they are thinking of investing in another business, they have less capital with which to do so.

On the whole, however, the process is a good deal for both sides. Provided that the legal documentation is drawn up correctly, and the seller is diligent in choosing the right buyer, seller financing can benefit everyone.

Are You Thinking of Using Seller Financing to Buy a Business?

If you're thinking of using seller financing to buy a business then we're here to help. 

We can match you with your perfect cash-flow positive acquisition opportunity from our inventory of thousands. Once you've found the perfect match, you'll seamlessly connect with the seller's intermediary, eliminating any wasted effort or time.

Sign up, set your preferences and our algorithms will do the rest.

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How to Use Seller Financing to Buy a Business: A Guide

Need some help getting the funds?

Check out this guide on how to use seller financing to buy a business.

Here’s What We Are Covering:

1. Advantages of buying a business.

2. What to look for when buying a business.

3. Using seller financing to buy a business

4. Learn the 5 steps to seller financing.

5. Benefits to seller financing.

6. Finding a business to buy.

You may have an entrepreneurial spirit and dream to own your own business. Now for the next step: how to turn that vision into reality?

You may begin to research different options. A startup involves a substantial initial investment of time, energy, and resources. It could be a while before you see any return on investment.

Another avenue is to buy an already established business. Finding a business will involve some legwork and talking to people in the industry, but the business has proven its viability in the market.

When it comes to acquiring a business, you have some additional financial options. Unlike a startup, which would rely on your own investment, investments from others, or traditional financing, you have another option of seller financing to buy a business that already exists.

Advantages of Buying a Business

There are some obvious advantages to buying a business, such as acquiring an existing customer base. This could otherwise take you years to establish. 

With an existing business, you will know the profits of the company. You may even be able to take regular draws or salary, which would be far less likely in a startup.

You would also be acquiring an existing operation. The business may have employees that would be retained after the acquisition and be a valuable asset going forward. This is much simpler than building the operation from scratch with a startup.

What to Look for When Buying a Business

Your steps in buying a business will usually involve three phases: search, negotiation, and closing the transaction.

As you begin your search, you will want to ask yourself the following questions about any business that you would consider buying:

• Why is the business for sale?

• What is the reputation of the business?

• What are the profits of the business?

• Do you think you can increase profitability?

The process of buying a business can be complex. You should use a business attorney to review the deal structure and an accountant to review the bank transactions, financial statements, and tax returns.

You should inspect the assets, such as any offices, storefronts, or equipment. Note the condition and cleanliness of these, as they reflect on the owner's care. You will also want to review any liabilities that the business has, including pending judgments or lawsuits that may not appear on financial records.

Once the deal's negotiations have been completed, you can move to the final phase and close the transaction. This is where funding will come into play.

Using Seller Financing to Buy a Business

When you use seller financing, the seller is essentially acting as the lender. A majority of small to mid-sized business acquisitions involve some kind of seller financing.

For the buyer, this can help achieve business ownership if there is not enough cash to buy the business otherwise. It removes bankers from the transaction and allows the seller and buyer to work together to finalize the deal.

The seller will carry the promissory note, and the buyer makes payments to the seller. This can range anywhere from 30-60% of the purchase price.

The terms of the loan are typically something like 5-7 years. Usually, collateral will be required, such as a mortgage on commercial real estate, along with a personal guarantee.

Seller financing shows that the seller has confidence in the profitability and performance of the business.

Steps to Seller Financing

Since the seller is acting as the financier of the transaction, there are some steps involved that are similar to what a bank loan would require.

1. The buyer will submit an application, including relevant personal financial information.

2. The buyer will prepare a business plan, as well as provide background and experience.

3. The seller will pull a credit report on the buyer.

4. The buyer may need additional funding, such as a traditional loan or investment from friends or family if there is still a gap between seller financing and purchase price.

5. The transaction is closed, with a lawyer or business broker drawing up the agreement.

When the seller is providing financing, the seller will want to determine the buyer's creditworthiness to ensure that the loan will be repaid.

Benefits to Seller Financing

In some ways, seller financing may benefit you even more than a traditional bank loan. You have likely already developed a relationship with the seller throughout the acquisition, and the financing is one more way to continue to work together.

A seller may be more flexible than the stringent requirements of a bank. And, unlike a bank, you have the ability to negotiate the terms of the financing with the seller.

Bank financing will typically involve a lot of fees. For example, you may have documentation fees or origination fees. Seller financing will have fewer fees.

Most importantly, you have the vested interest of the seller. The seller will want to ensure that the business continues its success, so the loan is repaid. The seller may continue to advise or consult with you as you take over the business, which can help with the transition both in the short- and long term.

Finding a Business to Buy

As you begin a search for an existing business to buy, you could start with traditional approaches of looking in your community and talking to people in the industry. Or you can take your search online. 

You can be matched with acquisition opportunities in your area based on your criteria and connect with a seller. Once you find a good fit, you can discuss the financing, including if seller financing to buy a business is an option.

Find a business for sale now.

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How to Get a Loan to Buy a Business

Want to buy a business

Here is how to get a loan

Are you worried about your lack of capital? Many successful businesses started with a loan. Get a loan to buy a business with these simple steps.

Loan to buy a business

Only 80 percent of small businesses survive the first year. After that, things get even worse. Only half of the small businesses pass the five-year mark.

Are you an entrepreneur wanting to own your own business but are afraid of failing? There's a solution!

Buying an existing business is a great way to increase your chances of success. And if you're worried about getting a loan to buy a business, we have the tips for you.

Keep reading to learn more about your options for financing your new business. 

Bank Loans

If you have a great credit score and can show a history of strong financials for the business you want to purchase, you'll probably qualify for a bank loan. Many banks offer their own loans and even small business administration (SBA) loans that are backed by the government.

If the company has a good history and a positive outlook, you may qualify for a loan with a low interest rate. However, bank loans aren't always the best choice. They can be time-consuming and often require you to make a deposit as collateral. 

Credit Union Loans

Credit unions are not for profit and are owned and control by their members. This means they often have lower interest rates and fees as well as more flexible lending requirements.

They tend to have a more personal approach and aren't bound by a set of strict guidelines. 

Online Business Loans

Prospective business owners can choose from many different options when it comes to online business loans. Online lenders offer a fast and convenient application process and tend to have higher approval rates than traditional lenders.

Be sure to compare rates and terms carefully to avoid getting stuck with a high interest rate.

Online Personal Loans

Personal loans can also be used to finance business ventures but it's important to shop around. While going this route can get you funding quickly, not all personal loan lenders will let you use the funds for business purposes. 

Seller Financing

If you don't want to get a loan from a third party, you may be able to make arrangements with the seller of the business. They will act as a lender and you can make payments to them for their business in installments.

Sometimes the seller will even finance part of the sale price. With this sort of arrangement, you can pay as you go. This can make managing your budget and cash flow much easier. 

Looking for a Loan to Buy a Business?

Starting your own business can be one of the most rewarding yet scary ventures you'll ever make. You can go into the process with more confidence and less risk by buying an existing business.

If you looking for a loan to buy a business, we are here for you. We help entrepreneurs buy existing businesses.

Click here to learn more about funding your new business. 

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The Top 5 Ways to Finance Buying an Existing Business

Buying a business

Here are five ways to financing your acquisition

Are you looking for innovative ways to finance buying an existing business? Read on to learn more.

Finance buying an existing business

In a lot of ways, running your own business is the ultimate fulfillment of the American dream. You set your own hours, act as your own boss, and get to spend your days doing something you love. But how can you become a business owner without all the risk that comes along with starting something from scratch?

What do you do if you want to finance buying an existing business?

There are a number of ways to approach business financing. From making arrangements with the seller to getting a standard loan, you can choose the option that works best for you. Read on to learn about some common ways to finance buying an existing business.

1. Seller Financing

Depending on who you’re buying your business from, you may be able to get the seller to finance the sale of the business. Like with a loan, you pay an agreed-upon amount every month for a certain period of time until you’ve paid for the business in full. This gives the business owner a guaranteed source of income for the life of the loan, and it allows you to avoid the initial up-front expense of buying them out.

Sell your business, buy a business, or buy a franchise with BizNexus. BizNexus matches business owners with the best intermediaries to help sell your business on the best terms. We leverage data science & verified reviews to confidentially connect entrepreneurs with business intermediaries who can help them buy or sell a business.

2. Partnership

If your seller won’t finance your purchase but you want to avoid a traditional loan, you may be able to go into business with a partner. Each of you would pay for a portion of the business, and you would run it together. This effectively doubles the amount of capital you have to invest in this business and gives you some help in running it.

3. Sell Stock To Employees

If you plan on having a number of employees, another financing option may be to sell stock to your employees. You’ll have to organize the business as an S-Corp or a C-Corp, and we would recommend selling non-voting stock so you retain ownership. But this option can get you a huge discount – possibly as much as 90 percent – on the business price.

4. Lease The Business

As with many other large purchases, one of your options with buying a business is to lease it. This will require cooperation with your seller since you will take over running the business and pay them a fee each month, while they still retain ownership. But it gives you time to build up capital in the business before you make the big purchase.

5. Get A Loan 

And, of course, a very popular option for financing buying a business is getting a loan. You can get a term loan, a Small Business Administration loan, or asset-based financing, depending on your situation. You can also use a combination of the three to get the right solution you need to buy your new business.

Learn How to Finance Buying an Existing Business

Starting a business is challenging enough, but knowing how to finance buying an existing business is a whole different ball game. There are a number of different approaches that will work, depending on your needs. Talk to your seller and your bank and see which option will work best for you.

If you’d like to learn more about entrepreneurship through acquisition, check out the rest of our site at BizNexus. We have tools to help you buy or sell a business or franchise. Check out our posts about buying a business to start planning your entrepreneurial success today.

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5 Effective Ways for Financing a Business Purchase

Financing a Business Purchase

5 Effective Ways

Financing a business purchase can be challenging, but there are some options to help you make this purchase. Keep reading to learn what these options are.

Financing a business purchase

In the third quarter of 2015, the median sales price for a business sold was $185,000. Most people don't have that much cash on hand. 

This means financing a business purchase is the only option. But there are several ways to find finance to buy a business. 

Which one you choose often depends on your current financial situation and the type of business you're looking to buy. We want to help you make the right decision on how to make a successful small business acquisition. 

Keep reading as we list five effective ways to acquire financing to buy a business. 

1. Financing a Business Purchase With a Bank Loan

If you want to buy a business and are thinking of making the purchase with a bank loan, make sure the existing company has substantial assets. Also, you'll need to prove you have good credit and a proven track record in the industry.

Expect that trying to obtain a bank loan to be very difficult and time-consuming. 

2. SBA Loans

The Small Business Administration (SBA) also provides loans. The best option to buy a business is to apply for an SBA 7A loan. 

If approved, you can get a loan of up to $5 million dollars. However, to qualify for the loan you must have the following:

• Good credit

• Provide three years of tax information

• Provide personal finance information

• Show prior experience in the industry

You must also prove you can put 20% down. However, you can also find that extra 20% through seller financing. 

3. Seller Financing

Seller financing is another option. With this option, you ask the seller to provide financing in the form of a loan. 

Typically this loan is amortized of a period of time and you pay the loan back using the proceeds of the business. This is an easier method to obtain than traditional financing methods such as a bank. 

More Transparent

It's more flexible, can often be cheaper, and since the seller wants to be paid back, they will be more inclined to provide you with accurate financial documentation. 

However, don't expect a seller to finance more than anywhere between 30% to 60% of the business unless you come armed with additional assets and can make a large down-payment. 

4. A Leveraged Buyout

A leveraged buyout happens when the buyer acquires a company using a significant amount of borrowed money to buy the company. Often the assets of the company being bought are used as collateral for the loans such as:

• Equipment

• Real estate

• Inventory

The assets of the acquiring company can also be used. 

However, if things don't go as planned, it may have a largely negative impact on your rate of return. Your losses may also be maximized. 

5. Get Financing Online

You have options when it comes to finding an online source to get a loan. You can choose a business loan, personal loan, and even a HELOC (home equity line of credit). 

Shop around for the best interest rates. Also, not all lenders are willing to give money to buy a business. 

We Help With Financing

Financing a business purchase isn't always easy because not every lender wants to deal with the risk. We're different.

We want to help entrepreneurs buy and sell their businesses with as little effort as possible. And we can help you with financing. Click here to learn how. 

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THE BIZNEXUS ROUNDUP

Quick & dirty interviews, war stories & tips from the trenches of business acquisition, growth & sale. We aim for value, efficiency & fun, so you'll walk away with something useful to take with you along the journey of buying, growing & selling a business.

5 Tips on Financing the Purchase of an Existing Business

Purchasing an Existing Business?

Here are 5 tips to help you finance the acquisition

There are a number of methods you can use when financing the purchase of an existing business. Here are a few that we suggest you try.

Financing the purchase of an existing business

More businesses are being sold than ever before. In fact, a record number of small business owners are selling their companies. According to this data, the number of business listings increased by 8 percent from the prior quarter. 

In a world awash with excess capital and with demand for reliable cash flow returns on the rise, prices for existing businesses & assets have been on the rise.

Popular acquisition targets typically have reliable, recurring revenue and cash flow, with an established brand and loyal customer base. With prices continuing to trend up, you’ll need to have your ducks in a row before you decide on the best way to finance an acquisition.

Read on for a guide to financing the purchase of an existing business. Explore 5 tips for purchasing a business that is highly effective.

1. Apply for an SBA Loan

The United States Small Business Administration (SBA) is a great resource for entrepreneurs. They work with lenders across the nation to guarantee loans against default.

Lenders are willing to take on more financial risk due to the government’s backing. SBA loans offer more favorable terms and rates than conventional funding sources.

There are a number of different loan programs to apply for. The most popular are the 7(a), 504, and microloan programs.

2. Consider Seller Financing

In some deals, the seller is willing to finance a portion or all of the deal. The benefit to the seller is that they can turn a greater profit.

There are also a number of advantages to the buyer. Perhaps most important is the ease of access to capital.

Also, another benefit is the speed of the financing deal. Seller financing is proven to be a faster alternative than conventional loans.

3. Make a Sizable Down Payment

A significant down payment is an effective method for reducing company risk. Like purchasing any asset, a down payment improves your financial position in the company. It reduces the amount of interest that you will pay over the life of the loan.

For business acquisitions, a large down payment is required. While mortgages require 20 percent, a business purchase usually takes even more.

The more cash you bring to the table the better. Many small business owners use personal funds for a down payment. For larger acquisitions, the down payment may require multiple investors pooling their resources together.

4. Angel Investors

There are increasingly common scenarios today where wealthy investors, feeling flush after 10 years of public market gains and looking to diversify into something reliable & attractive going forward, are interested in financing entrepreneurship through acquisition (ETA) as a viable investment vehicle. If you can sell those types of investors on your personal “why” story and your credentials to run a business, this can be a great option if you can get access.

5. Getting Creative

To finalize a business purchase, sometimes you have to get creative. These cases may call for a leveraged buyout or assumption of debt.

In a leveraged buyout, you trade-off existing assets in lieu of capital. An assumption of debt means that you are acquiring the company’s liabilities as well as their assets.

A Recap of Financing the Purchase of an Existing Business

Starting a business from scratch is hard work and risky. Many entrepreneurs choose to purchase an existing business instead and fund their entrepreneurial efforts from the existing cash flows of an operational business.

This option allows an entrepreneur to acquire a proven business model. Entrepreneurs turn to methods like SBA or seller financing to close a deal. If you want to learn more about financing the purchase of an existing business, Login to get matched.

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THE BIZNEXUS ROUNDUP

Quick & dirty interviews, war stories & tips from the trenches of business acquisition, growth & sale. We aim for value, efficiency & fun, so you'll walk away with something useful to take with you along the journey of buying, growing & selling a business.

Tips on How to Buy a Business and Entrepreneurship Through Acquisition

Generally speaking, buying an established business is considered less risky than setting up your own business from scratch. As an entrepreneur, you won’t necessarily need to come up with a unique business idea, sell investors on an unproven concept, or incur the costs & risks of building a business up from the ground level. This practice of acquiring an already established business is known as entrepreneurship through acquisition.

It’s Still Risky To Buy a Business

buying something that is already stable, and profitable doesn’t mean risk won’t still be a huge issue as with any form of business ownership and entrepreneurship. The large majority of businesses out there publicly listed for sale are riddled with issues you’ll have to find, fix and tweak to grow the business and determine the right price to buy a business. In 2019, we’ve seen a huge surplus of small business owners out there hoping to sell under-performing or unprofitable businesses, or businesses that have not yet been optimized for sale and to encourage new ownership. This can be a great opportunity to acquire and grow an existing business, but as an investment, the operational risk is absolutely still there.

So how do you buy a business? To avoid getting married to a bad deal, you need to investigate thoroughly the business opportunities you’re thinking of pursuing. And a well-thought-out approach is necessary for you to find and secure a good business. To help you buy a profitable, well-managed business at the right price, think through the following steps.

Identify What Interests You

Entrepreneurs hoping to buy a business typically focus on existing financials and current cash flow, but it’s equally important to align yourself with a target company’s culture & lifestyle goals. You’ll be considerably happier if you purchase a business that’s already aligned with your ideal work culture, and in an industry with which you care about and already have experience. The more informed and fluent you are with the model of a particular business, industry trends, products, or services, the more inventive and successful your expansion plans will be. Ultimately, it boils down to embracing your passions, skills, experience, and interests, and throwing yourself in head-first the moment transfer of ownership occurs.

Determine Whether It Will Succeed or Not

Other than money, you’ll be spending time, energy, and hair follicles. Take into account the time and energy requirements you intend to take on for the day-to-day management of your new business. Some managers would rather be “grinding” all time, with their employees, but most investment-focused buyers will favor delegation and putting a capable management team in place, while they can focus on oversight and growth through acquisition. The number of resources you’ll need to invest will be influenced by the people and procedures already in place on the ground, and your prior understanding of the industry & relevant players.

Think of Why the Owner Is Selling the Business

If you’re about to purchase an enterprise, you’ll need to know precisely why the business is no longer working for its recent owner. There are many reasons why a company owner might want to sell a business. And you must get an honest outlook of how the operation is doing—without the seller’s influence.

Keep an eye on the existing business debts, condition of the equipment, competition, location problems, inventory problems, and any brand problems. Also, ensure you are updated on the current business’s achievements, failures, future opportunities, and possible challenges. Apart from speaking to the current owner about these issues, also engage employees, existing customers, neighboring companies, residents, and any relevant person you can think of.

Find a Business That Meets Your Budget and Personal Needs

Strategies to find the right business on the market that fits your needs include classified newspaper ads, online business-for-sale websites, and working with a business broker. Bear in mind that business brokers representing existing businesses for sale lawfully represent the seller. For this reason, be careful about passing on sensitive, potentially compromising information to them. Nevertheless, a business broker can help you decide on the kind of business you need, screen companies to eliminate businesses that are unlikely to sell, and assist you with the paperwork and help with negotiations to get a deal done.

Take into account that, if you involve a broker, a commission of 8%-15% will typically be required (paid by the seller), which can be well worth it for a business broker who works hard to facilitate an optimal, pain-free transaction… As a buyer, you’ll want to hire a good accountant to appraise business financials and make sure the cash flow number you are negotiating is accurate.  It’s also critical to have a competent business transaction, M&A-focused lawyer to represent you in negotiations and keep you informed about how the transaction will be executed, and how the delivery of the purchase price will be paid out over time.

Do Your Due Diligence

Assemble as much data as you can before buying an enterprise. This is one of the most critical steps on your way to becoming a business owner. In this period, work with your lawyer and accountant to guarantee you get all the facts and figures you need before proceeding.  This will help you ascertain that the business owner isn’t out to sell a startup for the price of a well-established business with a track record of reliable profits, revenues, and paying customers. Be aware; the seller will most likely require you to sign a non-disclosure agreement. This safeguards the seller should you decide not to buy the business after reviewing the documents. Below is a buy a business checklist of the materials that the seller should have prepared for you:

• Contracts and leases

• Business permits and licenses

• Business Financials

• Environmental regulations

• Zoning laws

• Certificate of good standing

• Condition of the inventories

• Organizational chart

• Letter of intent

• Code

Signing the Sales Agreement

After due diligence, comes the final verdict; whether to buy the business or not. In case you decide to go ahead with the purchase, the sales agreement is the “strap” that binds it all together. The agreement will spell out the final buying price, and every item you are buying, including intellectual property, tangible assets, intangible assets, and customer lists. Make sure you have a good legal representative to help you piece this list together.

Value the Business 

Whether you do it yourself or hire a professional accountant or certified valuation analyst (CVA), being aware of how businesses are valued is important for any buyer. Note that, before a business is transferred to the buyer, both the seller and the buyer have to settle on an agreed-upon price based on revenues & cash flows of the business. Often, buyers and sellers have their own unique processes for zeroing in an agreed-upon financial value, and this forms the basis of their negotiations. Some of the most common models of valuation for an existing business include the market approach, asset approach, and earnings approach.

Raise Funding Needed to Buy the Company

As soon as you’ve settled on a price, the next phase is to get the money. There are numerous distinct channels through which you can access the cash you need to buy the business. Are you aware of the different means of financing a new business acquisition? Some common financing options to business buyers include:

·         Personal financing

·         Debt financing

·         Search fund

·         Seller financing

Closing the Deal

It doesn’t matter you’ve reached an agreement on the terms of sale and price; the transaction could still be torpedoed based on terms, and how compensation will be distributed over time. A buyer can walk away from a negotiation at any time if a deal isn’t working for all parties, or if a seller decides to get greedy or back-track on previously agreed upon negotiation items.

Transitioning the Acquired Business

Typically, the seller will help you for a period of time as a consultant while you get up to speed with the day-to-day requirements of running the business. Make sure you clearly outline the responsibilities of each party in a written contract, and how the training will be conducted. Transitioning to new ownership can be a rough time for existing employees, and you want that to go as smoothly as possible. As a new owner, put mechanisms in place to make sure the business transition goes smoothly for all parties involved. Create time and speak to key personnel, suppliers, and customers before assuming day-to-day leadership. Let them know your plans for the company’s future, and pay close attention to existing stakeholders’ feedback and opinions as you move forward with the business and make incremental changes to the model, processes, and team.

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Why you need seller financing to buy your next business

If your broker is telling you that seller financing isn’t an option to buy an existing business that you like, I recommend you test that with the seller of the business personally.

What is seller financing?

It’s when the seller of a business acts as your bank. More often than not, when somebody is selling their business, they expect to lend you up to 50% of the business value in the form of a note, carrying interest and being paid off through the cash-flows of the business over a period of five to seven years after the purchase of the business.

In his blog, business broker guru Richard Parker explains:

While the terms can vary including interest rates, length and percentage of the total deal being financed, a general rule is for the seller to carry thirty to fifty percent at current interest rates plus a few percentage points over three to seven years.

The dilemma for many buyers however is never getting to the point of presenting sellers with an offer because they are often stonewalled by brokers or the seller’s legal/financial representative, or family members trying to dissuade them from carrying a note.

I can certainly understand a seller’s trepidation, but the reality is that if they truly want to sell their business, they have to participate in the financing. End of story. Otherwise, their business will be another one that remains on the market forever.

–Richard Parker, author of How to Buy a Good Business at a Great Price 

How common is seller financing?

Most sellers start out cold on the idea of seller financing because of the risk involved for them when it comes to the buyer actually paying them back for the loan, but it’s a great move for everybody involved when you consider the fact that this tool helps the seller attract potential buyers, and may even help the seller achieve a higher final price for his or her business. Seller financing can also help lead to a faster closing, which increases the probability of a transaction successfully closing.

BizNexus -Learn More From Our YouTube Playlist:

BUSINESS ACQUISITION

Have you checked out our podcast?

THE BIZNEXUS ROUNDUP

Quick & dirty interviews, war stories & tips from the trenches of business acquisition, growth & sale. We aim for value, efficiency & fun, so you'll walk away with something useful to take with you along the journey of buying, growing & selling a business.