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HOW TO BUY A BUSINESS WITH SELLER FINANCING
Advertising and publishing veteran Janet Regan was looking for a business to buy. The right opportunity presented itself last year when she found Guilded Publishing, a company that distributes a quarterly resource guide for-Northeast Ohio seniors. The only catch: Regan didn't have the $500,000 asking price.
With few physical assets to borrow against, she was unlikely to get a bank loan. So with the help of her business broker, she negotiated a seller-financing deal and bought the business five months later with just 10 percent down and quarterly payments due over 10 years at about 6 percent interest. Of course, most sellers won't finance 90 percent of their asking price. But borrowing 10, 20 or even 30 percent from a seller at a competitive rate still beats using your credit card to cover capital shortfalls. If you're interested in seller financing, here's what you need to know.
WHEN IT MAKES SENSE. Being short on cash isn't the only reason to push for seller financing. These loans also can bridge the gap if you and the owner can't agree on price.
Rico Cervantes, who bought a dance studio near Henderson in 2013, will attest to that. He had the money to pay the six-figure asking price in full but thought the seller wanted 20 percent too much.
"I wanted him to-put his money where his mouth was," Cervantes says. Both parties went into negotiations and eventually got what they wanted. Cervantes has since increased revenue by 28 percent.
WHAT SELLERS EXPECT. Besides cashing out, sellers want assurances that their baby will be in good hands. They want a buyer who is experienced in the industry, with a solid business plan, working capital and roots in the community. Sellers treat these loans as seriously as any bank would. This means requiring a credit check, collateral (business assets and possibly your home) and life insurance. Loan terms often extend up to 10 years, interest rates are comparable with those offered by banks, and it's typical for sellers to stick around for 60 to 90 days post sale to advise the buyers.
HOW TO VET THE DEAL. It's not enough to grill the owner on the intricacies of their business. You have to scour the financials, from bank statements and cash flow to tax returns and P&L reports. You also have to inspect the physical property to ensure all inventory, equipment and other assets are accounted for and in working order. Otherwise, you don't know what you're getting.
Trusting the seller is imperative. Make sure it's someone you actually want to be in business with after the sale is complete maybe even negotiate a transition period during which the seller played consultant.
Another must: having a business attorney in your corner, even if you're working with a broker.
WHAT TO NEGOTIATE. Owners may not openly advertise their willingness to partially finance a sale—but, it's common for them to consider lending at
least 5 to 15 percent of the purchase price.
JT Ybur of Tucson, Ariz., who bought six owner-financed businesses over the past five decades, suggests agreeing to the asking price but getting creative on the terms. Regan, for example, nabbed 90 percent seller financing by promising to apply for an SBA loan two years down the line. If she gets it, she'll pay off the seller in full. Other buyers can bridge valuation disagreements with an earn-out clause that grants the seller extra pay during a set period if profits meet or surpass expectations; you can dream up 100 different ways to do this, it really boils down to what the owner wants to accomplish.
With all of being said, Have you ever gone grocery shopping without some type of shopping list? Maybe it’s written or memorized, or if you are like me, your list is typed out and organized by grocery aisle (this is not recommended for those of you who are “right brained”). While we may have some flexibility when doing grocery shopping, there is little room for error when it comes to buying a business.
Buying a business is obviously an important decision with many moving parts. When considering whether or not to purchase a business there are many things to consider. Our due diligence checklist shown below can start you on the path to buying and operating a successful business.
Checklist for buying a business
• Company Tax Returns – last 4 years
• Profit & Loss Statements – last 4 years
• Current Balance Sheet and Profit & Loss Statement
• Bank Statements – Last 2 years
• General Ledger Detail – Past 2 years
• Copy of current contracts (i.e. leases, supply agreements, jobs, etc.)
• 940’s & 941’s payroll tax – last 4 years
• Employee list, job functions, salaries and benefits
• Copy of insurance policies
• List of equipment that you will be purchasing
It is important that you find out all you can about the company you are buying. Depending on your industry and the nature of the purchase, there may be additional items to add to your checklist. In many cases a business purchaser will use the services of an accountant and an attorney for some due diligence process. By identifying issues in advance you will be better prepared to negotiate the final purchase contract and less likely to have disputes after the transaction has been completed.
Are you considering going into business for your self or purchasing an existing business? The M & A Legal Management services team may be a perfect fit for for you and a profitable business. Let us help you.
M & A Legal Management
6655 W. Sahara Ave, Ste B200
Las Vegas, Nevada 89146