There is a saying among business brokers that "the seller sets the price and buyer sets the terms." The fact is, based on the data revealed in Bizcomps, the largest database of small business sold comps, approximately 70 percent of all small businesses sold include seller financing. This is so for five reasons:
- As in the case with the purchase of any high-ticket item, few buyers have the wherewithal to pay the full price up front.
- One of a buyer's principal objectives is to obtain the highest return on his or her down payment (return on investment) possible - i.e., the business's cash flow divided by the down payment. Thus, the more a seller is willing to carry back in a note, the more attractive that investment will appear to a buyer compared to alternatives.
- Most buyers want to 'leverage' their existing cash with seller financing and will seek those opportunities where this is possible. Thus, if a buyer has, say, $100,000 in cash and has the option of paying all cash for one business worth $100,000 or buying a larger business worth $200,000 by putting $100,000 down and financing $100,000, 99.9% of all buyers will buy the larger business.
- Buyers want some assurance that the seller is not dumping a loser. Generally, the seller's willingness to carry back a significant portion of the purchase price is taken as an indication that the seller believes the business is viable.
- Seller carry-back financing is the principal tactic employed to close the gap between a seller's 'ask' and a buyer's 'bid' price.
Due to the current state of the Credit Markets and Bank Financing, Seller financing is more important than ever in facilitating the actual close of escrow in a Business Sale. Everyone is aware of the difficulties in procuring financing on small businesses these days. Everything must be perfect. At one point a few years ago I think I could have gotten my family dog a loan. Today worthy buyers are still getting rejected. The bail out has not reached Main Street.
Therefore Sellers need to structure their notes properly to secure themselves as safely as possible. There are several factors to consider when carrying a Note. First of all the Seller needs to be realistic in terms of what the business can support in form of a monthly payment. No one knows this better then the Owner who has been operating the subject business. If the business has a monthly adjusted net profit or owner benefit of $5,000.00, you can not receive a $5,000.00 monthly payment. The Buyer will expect the business profits to make the payment and leave him some money too. Don’t set your Buyer up for failure.
Now to make the Sellers note as “tight as possible”, the following terms should be incorporated into the note:
Late Fee: Typical notes will begin having the first payment due 30 days from the close of escrow. A typical Late Fee clause is 10 days from due date and a penalty of 6% of the monthly payment. Personally I like 10 days and 10%. In my many years of experience in selling businesses, I’ve found out that if a Buyer is late once and I remind them of the 10% late fee they will do everything possible to not incur it again.
Collateral: Typically the business assets are collateral for the note. In this case there needs to be a written Security Agreement attached to the note. Ask your lawyer or escrow company to supply the Security Agreement. Read it. Not all are created equal. A good one will require the note holder’s (Seller’s) consent to transfer the note and note holder’s consent to substitute or replace any items of collateral (equipment) with like or comparable collateral. A list of inventory, equipments and domain names has typically been used as a part of the Sellers overall collateral. All Security Agreements should also define a Breach so that enforcement of the Note and Security Agreement are “cut and dry’.
UCC-1 Financing Statement: This instrument perfects your note by registering it with the Secretary of State. Make sure it is listed on the UCC-1 that “all inventory and equipment are collateral, along with domain name, cash, receivables, deposits and any other tangible asset that the subject business may have.
Thank you for contacting us to provide valuation and we hope you will give us an opportunity to sell your business. We will be happy to share testimonials from internet business owners whose businesses we have sold and we will be even happier if you asked us for their phone number to get a firsthand account of their experience working with us. Once you have had an opportunity to reflect on information in this valuation report and consider your selling decision, we will appreciate if you could please complete a short survey on next page and send it back to us.
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