A Practical Guide to Seller Financing

A Practical Guide to Seller Financing

A Practical Guide to Seller Financing

Selling a business is one thing, getting paid on the sale is another.  The options available for financing the deal are dependent on the business and the buyer. Here are some things to be aware of if you find yourself with a chance to sell your business.

Seller Financing:  The good, the bad and the uh oh

Seller Financing as the ONLY Financing

The Good:

  1. Seller provided financing opens the sale up to a wider range of buyers (though not necessarily higher quality buyers).
  2. Without a 3rd party lender (SBA, Bank, etc) the deal can likely get to closing faster than if bank financed
  3. Buyer usually isn’t as price sensitive since there usually isn’t a 3rd party valuation
  4. You may be able to cross-collateralize or obtain cross default agreements to tie up assets.
  5. If you get a personal guaranty from buyer you may have better chance to get paid.

The Bad:

  1. If the buyer defaults on the note it can be expensive to try to collect
  2. If you worry as much about the note payment as you did about the business are you any better off?
  3. Unless done properly there can be all kinds of tax issues

The Uh, Oh:

  1. If the buyer has a lease on facility you may need a landlord subordination agreement or you won’t be able to get to the collateral or worse, you might have to pay the back rent in order to get to your collateral.


  1. Get the landlord subordination agreement at the time of the sale.
  2. If you can, cross default the lease and note so that if buyer is in default on either they are in default on both.
  3. Make certain to file a UCC1 on the collateral assets so the whole world knows your note needs to be paid before the assets can be sold.
  4. Try to get a really high default interest rate on the note so that the financial pain of default is high.
  5. Consider a sub-lease to the buyer rather than buyer getting a new lease. That way you retain control of the facility and can act faster if you need to intervene.
  6. Try to get collateral other than business assets. Does buyer have a vacation home? Other assets?
  7. Guarantors – get as many guarantors as possible also make sure spouse signs guaranty if required in your state.
  8. Require buyer to provide financial statements and tax returns to you for as long as the buyer owes you money so you can keep an eye on the business health.

Seller Financing with Other Types of Financing

SBA Loans with subordinated Seller note:

The Good:

  1. The Bank is likely to screen the buyer more thoroughly than most sellers
  2. The seller note is likely to be less than 10% of the total selling price.

The Bad:

  1. The bank will look very carefully at the business cash flow (several years), seller financials need to be in good order.
  2. Bank will require a 3rd party valuation to make sure the price the buyer and seller agreed to is fair.
  3. SBA limits any “after the sale” arrangements between buyer and seller.
  4. The seller note will likely have a period (usually 2 years) whereby the seller gets NO payments and only interest accrues.
  5. If buyer defaults on seller note the Bank will limit what actions the seller can take to get paid.

The Uh, Oh:

  1. Because of the restrictions in the bank subordination agreement the seller note is usually the first obligation that goes unpaid.
  2. If the seller stops paying you it’s usually a sign of other significant problems with the business.
  3. If the buyer stops paying the note the seller recourse is basically limited to enforcing the personal guaranty.

Revolvers (also known as Asset Based Loans) – with associated seller note

Definitions: a “revolver” is a bank loan or financing company loan that gets adjusted every month (or week or even day). These revolvers are tied to accounts receivable (a/r) and/or inventory and are a % of those items. For example a common revolver term is a bank loans the business up to 70% of current accounts receivables and/or 20% of good inventory at cost.  (The a/r % is high because a/r is highly liquid and can be collected quickly. Inventory is much more difficult to liquidate and has high costs associated with liquidation i.e., warehousing, transportation, auction costs etc.)

The Good:

  1. A revolver is flexible in that if funds cashflow when the business is growing.
  2. A revolver usually has fewer covenants.
  3. The “credit worthiness” of the business is less stringent than normal bank standards

The Bad:

  1. The seller note will lose a/r and inventory as collateral.
  2. The revolver lender usually can “pull the plug” at any moment
  3. The cost to the borrower can be significantly more expensive than an SBA term loan.

The Uh, oh:

  1. Revolver loans normally have many fees and opportunities for lender to squeeze a few more dollars out of borrower
  2. Revolvers are famous for high cancellation fees if you want out of the deal.

Credit Card Loans Against Receipts – along with seller financing

Description – With these loans a lender “forecasts” your credit card receipts and lends you money in advance, then when the customer credit cards are process for the business sales then the money is redirected to lender to pay off the loan they advanced. Generally speaking these loans are used for retail stores, restaurants, etc with high % of credit cards sales and highly predictable and regular sales. Take the time to calculate the real costs of this kind of financincing, it can get expensive quickly.

The Good:

  1. If you have high volume of regular credit card sales these loans are not difficult to obtain
  2. The cashflow is steady

The Bad:

  1. These loans can be very expensive
  2. The CC lender gets paid before the seller note by taking their money out of the sales revenue.

The Uh, oh:

  1. Because these loans have a claim on all revenue it is very unlikely any other 3rd parties would provide financing.
  2. The process of payment takes control of cashflow out of biz owners hands (which could be a good thing in some cases)

If you are selling a business you’ll need to risk adjust the price depending on the financing structure that the buyer and seller agree to. Also, make sure to get good legal and accounting advice to understand what the net value is. And finally, look closely at the risks associated with any financing arrangements.

Diversify Your Business

Diversify Your Business

4 Ways to Eliminate Customer Concentration and Build Confidence with Prospective Buyers

It’s value suicide. A company with more than 15 percent of its revenue with one customer is at high risk of having the rug pulled out from under them.

As the owner of such company, it’s going to add difficulty when it comes time to sell.  And for any potential buyer, the risk is higher unless you can prove growth potential by finding more like customers, and fast.

If you are preparing your business for sale, you need to start to think like a buyer. If you have customer concentration issues, stop looking at the business as the operator and start looking at it from an opportunity and sustainability stand point—especially under new ownership. Remove yourself, your history and past knowledge from the business, because that is exactly what a buyer is going to get.

There’s no doubt that you worked hard at building long lasting customer relationships, especially with a major client. But in selling your business, it’s a red flag.  It’s risky. That client could leave shortly after you are gone. The buyer will always be fully aware of such risk and there’s no hiding it.

Here are some ideas on how to minimize that risk for the potential buyer and better position your business for a premium value:

Remove the Client Trap

You aren’t alone, a lot of business owners fall into this trap. It’s easier to please and upsell existing clients than it is to look for new business.  Start looking for “like clients”.  Every good client is a profile for another new client. Same size, same problems or same needs, figure out the key component and start looking for a new client that mimics your cash cow.

Ask for Referrals

Happy clients are also happy to refer you to others.  It’s the entire basis of the Net Promoter Score and why so many companies are using it not only to improve customer service but to prove viability of the business.  If you don’t ask for referrals, you won’t get them.  Stop by or give your best customer a courtesy call, let them know you are looking to grow your business and ask if they know of any other business that could utilize your services. If not now, ask them to keep you in mind.  In some cases, businesses offer a referral fee. This may or may not work for you, but it’s another option to reward the referring party.

Seal the Deal in Writing

When you have a customer or client who is a significant portion of revenue, get the deal in writing including the duration of the agreement. Although contracts can be nullified post-transaction, at least the contract minimizes the risk of them leaving and gives the new owner some peace of mind.

Remove Sole Dependency

Many times in key accounts like this, the customer has become dependent on you. They want to only work with you or negotiate with you.  Start to transition this responsibility with another team member now, even if you aren’t looking to sell right away. The customer needs to transfer their confidence from you, to the business. This will add even more assurance to the prospective buyer.

Minimizing risk is the number one thing you can do before listing your business on the market. The less risk there is, you can sell for more and sell faster. Customer concentration is just one area to reduce that risk. Keep reading our blog as we go through other areas to increase the salability of your company.

Business Sale: Tangible vs Intangible Assets a Quick Analysis

Business Sale: Tangible vs Intangible Assets a Quick Analysis

We find a wide variety of views and preconceived notions about business value from individuals as they review a business sale. Most the time, the discussion turns quickly to the business assets. That inevitably leads to a discussion of Tangible and Intangible Assets.

Investors involved in a business sale generally have a reasonable understanding of tangible assets but usually a less than good understanding of an intangible asset. They have a tendency to use disparaging terms like “Blue Sky” or “air ball” when they don’t understand the true value of intangible assets.

First let’s try to reach common ground on some basic definitions that are commonly used but not always understood.

Tangible Assets

Tangible assets are really based on banking and lending definitions. A general definition is an asset that has a physical form. For instance a truck is a tangible asset. You can touch it, feel it and more importantly sell it. While a truck is a tangible asset that may be salable, there are other tangible assets that might have different characteristics. Suppose you own a widget shop and you have a special machine you invented that bends the widget a special way. You love the machine but it’s of no use to anyone but you. That is still a tangible asset but it has relatively low value to the outside world. The truck you can likely sell pretty easily but finding a buyer for the widget machine might be a whole different problem.

Intangible Assets

These are assets that don’t have a physical form. For instance the trademarked Nike swoosh is a very high value intangible asset. One way to think about tangible vs intangible assets is tangible assets are used to make or deliver the product or service and intangible assets are what are used to generate the demand for the product or service or create the system to produce the product or service efficiently.

A very well known intangible asset is the secret formula for Coca-Cola. That formula has no tangible form, it’s basically words written down somewhere (likely different parts of the formula in different places). But that intangible asset is worth much more than the cost of the machines (tangible assets) used to produce Coke.

Now that we have a basic idea of the assets, let’s talk about why we have assets at all and how they effect a business sale.

Assets in a business have only one purpose (or one purpose that makes sense), to generate profits.

So what kind of assets are best for generating profits?

I’ll give you 2 simple but real life situations.

1) Let’s say you can buy a machine for $100 that will generate $25 more per year in profits. You decide that’s a good investment, so you invest the $100 and you’ll get your $25 per year profits for as long as the machine works. So now you have a $100 tangible asset (the machine) and a $25 cash flow from it.

2) Now let’s say you add an email capture tool to your website, it captures visitors’ email addresses which you can use to automatically send out specials and mailers. The email tool costs $100 and generates $25 in cash flow.

In this case you created 2 intangible assets:

a) the email tool on your website and b) the list of emails of people interested in your products.

The intangible asset with the highest value is the list of emails for people interested in your products. Anybody can buy the email tool for $100 but you have the specific list of people’s email addresses that represent potential sales, this list is an intangible asset.

Think of it this way. Two businesses are exactly the same except one has the email addresses for these customers and one business doesn’t, which business is worth more?

The moral of this story is that when investigating a business sale and determining the value of the business for purchase, the assets that have real value are the assets responsible for generating the business profit, regardless of if they are tangible or intangible. A smart buyer knows how to identify those assets and isn’t blinded by the tangible asset mantra preached by the bankers.

Sunbelt Completes Sale of Industrial Instrumentation Distribution Business

Apr 2011 – – Succesful sell an industrial distribution business. Company specializes in instruments and complex monitoring panels for heavy industry.

Sunbelt knows industrial distribution. Sunbelt’s Managing director, Dan Elliott, owned a wholesale distribution company that did $40,000,000 per year in sales.

Experience counts. Sunbelt has sold many distribution companies valued between $500,000 and $20,000,000.

Starting a Small Business – What’s the most important question to ask?

Starting a business is more complicated than most people think. There are many issues to deal with and questions to ask when thinking about starting a small business. Starting a business the right way can inprove your changes for success.

Should I incorporate? LLC? C Corp? S Corp?
What name should I use?
How do I get or set-up my website?
How do I find a CPA? Do I even need a CPA?
How do I get a license to do biz in my state?
What accounting? Quickbooks? Excel?

And the list goes on and on…
But the real most important question is this……………….

If I start a small business, how do I get out of my small business?

What is your exit plan? Your goals, time frame, limitations?

If you will think through, with honesty, this question – How do I exit my business?  You will make a better decision about how you go into your business. Do you want to sell the business? If yes, then there are things you need to do when you set up your small business…Want an example?

If you want to sell your business don’t name your business after yourself. Believe me, Wizards A/C and Heat Service is easier to sell, and at a higher price, than John Q. Smith, Inc.

If you want to sell your business keep your financial information accurate, timely and clear. It is very difficult to sell businesses that have poor records and financial statements. Don’t be tempted to “massage” your financial statements to reuce your taxes, it will cost you dearly when you sell.

Think about your exit plan, it will help guide your decisions and avoid value crushing mistakes that we see made every day.

Send me your start up questions that relate to your exit plan, I’ll take a shot at getting you useful answers.