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Business Financing: Using Business Seller Financing

What Is Seller Financing?

When selling a small business, one of the most important things you need to consider is where to find your prospective clients, and how you can attract them to buy your business. Seller financing is one of the things you can offer to attract a wider scope of prospective buyers. There may be a lot of buyers who will be interested in your business and they have the skills to run and manage it properly, but lack of financing prevents them from buying it. You will surely sell your business faster for the price you want if you try to understand buyers’ motivation in purchasing your business, and if you are willing to accommodate the buyers’ inquiries.

What Is Business Seller Financing?

At some point in owning a business, you may admit that you just suddenly want to sell your business for X amount. You may have arrived at this estimated price by using a combination of valuation methods. These include analyzing the sale price of related businesses for sale in your location and other areas, determining the corporate assets’ value, and factoring potential growth of revenue. Whether or not the buyer agrees to your asking price also relies on a number of factors, but the most important of all is business financing. Not all aspiring entrepreneurs have enough cash on hand to buy a business. Most of them have money for the down payment and they plan to pay for the balance via loan transactions. Credit unions and banks are the ones to turn to for business loans, but due to current condition of the economy, business and consumer credit markets have become strict and tight on providing loans. With this, aspiring business owners turn to business seller financing, where the owner of the business for sale acts as the lender.

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Why Offer Business Financing?

The following are some of the reasons why you ought to consider seller-based financing when you sell a business:

The interested buyer intends to meet your asking price but is short on available cash to pay the amount in full.
The interested buyer has excellent credit and a solid knowledge of the industry. However, he is unable to get financing due to current economic conditions.
You wish to lessen your tax liability by receiving the profits of the sale in installments instead of a lump sum.
You want to retain some control over the company during the transition process to ensure its ongoing success.

Seller Financing: How Does It Work?

Being the owner of a small business for sale, you may want to check the credit status of every potential buyer of your business. The information you need to examine are net worth, credit history (commercial and personal), as well as the experience the buyer has in your industry. Surely, you want to be certain that the buyer will run the company successfully so he or she can pay you on your loan. Some business sellers ask for a higher down payment compared to banks and other credit unions because the risks are significantly higher. This process attracts buyers since you are willing to invest time and money for their success. Once you and the buyer have agreed on the sale price, interest rate, and loan period, you can offer 7 to 10 years payback duration.

There are different ways to set payments. Some have varied tax consequences on the seller so be sure to consult a tax attorney before completing the payment paperwork. A straight-line payment allows the same amount to be paid each month until the entire loan is settled. It is also quite rare to find provisions that penalize prospective buyers for paying off the loan early. Any interest paid by the seller is offset by quickly gaining the use of the entire loan amount. Another payment method is based on a performance-based schedule. With this, payments go up at times of higher than average net income, and decline when sales go down.

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Tags: Business, Financing, Seller, Using

Business Seller Financing

Seller financing

A seller that is willing to accept terms will usually have a different price for a financed deal versus cash only deal. If the buyer is asking for terms, then their negotiating position is weaker than if they were paying the cash out price in full. It does not matter to the seller if some of this money is from a loan from another source.

If terms, using the seller, are the only way the deal can be floated, then this will take some serious discussion as to length of time and the amount of the loan. The balance will come from money the buyer has access to. The purchase price of a seller-financed purchase can carry a premium of 40 to 60% more than the cash price. It is obviously in the buyer’s interest to get the money elsewhere so that the cash only price can be met.

This large variance in price makes for spirited negotiating and leaves a great deal of room to come up with a deal. This is where a third party like a business broker is very useful as they have been through this stage of a sale many times. A broker would have more experience at this deal making than either the buyer or the seller in most business sales.

Third party financing

If the company being purchased has a solid financial history that can be documented by a CPA or a business attorney, then it may be possible to get some financing from a bank or a private lending group. The buyer would also have to have a very good credit rating, as the loan will be made to the buyer and the business with both responsible for the loan.

A private lending group may be a little easier to get a loan from, but the interest rate would probably be higher.

It may be possible to get the needed money from relatives or friends in order to make the purchase. In any event is it worth trying all avenues to get the needed funds. The worst that can happen is the answer is no and the deal cannot be made.

Other possible money sources

It may be possible for the buyer to become a majority partner for a time with the old owner in order to make the sale. All of the business liabilities would be the new owner’s problem, but the old owner could be a participant in the business until it is paid in full. This would be a tricky negotiation, but it could be pulled off with a motivated seller.

One source that may have real possibilities is the use of angel financing. This is money put up by an investor or investor group to help a company with good prospects grow. The buyer would be advised to see if this is a possibility as there are many advantages to this way of raising money. The best part being that the money does not have to be paid off until the company is sold or taken public. If the company has prospect like this due to an invention or a new product, then it is possible to attract some attention.

Caveats for both the buyer and the seller

Any financing that is arranged to make the purchase must be based on reasonable growth for the foreseeable future and not a huge increase in business. If the increase does turn out to be better than expected, the buyer will be able to retire the debt sooner. But, the buyer should not count on this in order to make the payments. The payment needs to be structured using conservative projections for the business’s future sales and profit. Any other scheme could be destined to failure from the get go. A payment plan that is based on pie in the sky will work to the buyer’s detriment and the seller will end up with a repossessed business that could be harmed by a desperate owner. This would be a very bad arrangement for all concerned.

The secret is to come up with a plan that will work if everything stays exactly the same. If the business has a steady flow of cash over time, then it is likely that this will continue into the future. This plan will lend itself to completion that is in every one’s best interest.

All business deals are unique

Almost all sales of a business are unique and require a different approach in order to pull the sale off. Fixed multipliers are just guidelines to come up with an asking price and are not set in stone. Subjective values of businesses are the norm and may well be why a pro needs to be brought in to evaluate the business’s value. This is the key to future financing whether it is the seller that makes the loan or another party. If the business is one of a kind it is even more difficult to come up with an asking price. In this case it is even more important to hire a certified business broker Find a business broker near you. Putting a value on an existing business is part real numbers and part a skillful art. At least the pro has some idea of where to start when coming up with a price.

Conclusions

Early in the discussion of the sale of the business, the air should be cleared as to where the purchase money is coming from or if the buyer is going to need to use financing to make the purchase.

The seller needs to let if be known if they are willing to accept terms or finance part of the purchase price. If they are looking for an all cash deal, then this should be stated also.

Laying out the cards early lets both parties know if they should continue the discussion or move on. Structuring a business purchase is all about factual discussions and obtaining the pertinent information. Honest disclosure will move the deal along faster if the discussion is acceptable from the beginning.

If the seller and the buyer are still interested at this point, then further discussions could be held with the hopes of finding an agreement that works for both. Since terms are part of most deals, this is not usually an obstacle. If there were no seller financing then many deals would never be finished as other financing would not be available. As it turns out this is the grease that makes deals slide together and become a win-win situation.

Tags: Business, Financing, Seller

10 Tips for Better Seller Representation

As Realtors, our fiduciary relationship with our clients requires a high level of good faith, loyalty and confidentiality. We have a duty to protect our clients’ best interests. Here are some tips to improve the representation of your seller clients. Please note that these are only based on my personal experience as a Realtor, and are not intended to be legal advice. If you have a legal question about your duty to your clients or your clients’ disclosures, you should contact an attorney.

Get to Know the Property

It is crucial to take notes while you inspect the property that you will represent. Make sure the sellers understand what will convey with the property under the sales contract. Clarify items that they do not wish to convey. Ask about porch swings, fountains, play structures, mirrors, speakers, pot racks, etc. Understand the property lines, and find out about adjoining properties. Check the ownership of nearby land that the sellers believe is a greenbelt. A thorough inspection and understanding of the property is fundamental to good representation.

Prepare Complete Disclosures

In most cases the sellers are required to fill out a disclosure form, answering questions and disclosing facts about the property. After the sellers have completed the form, take the time to review it and ask questions. The sellers may not have understood a question, or were reluctant to say something negative, or may have forgotten an item that needs work. For example, a seller forgot that, years ago, he had replaced some damaged wood floor with plywood under an area rug. Ask the seller to think carefully about repair items that will not be easily noticed.

Sometimes the sellers have copies of inspection reports or previous sellers’ disclosures. These documents are a part of their knowledge of the property, and should be a part of their disclosure. If the property has been rented, the seller may have a log of repairs that have been done.

Disclose Significant Repairs

Sometimes sellers ask if previous repairs need to be disclosed. Of course, it is not necessary to write down every repair that was done during the sellers’ ownership. However, it is prudent to disclose repairs related to water, fire, structural integrity, or termites. In addition to these types of repairs, all major construction should be noted. By disclosing these items, the sellers give the buyers an opportunity to investigate them further during the inspection period if they wish.

Put the Sellers’ Interests Ahead of Your Own

The disclosure process may require that we make recommendations that sellers do not want to hear. For example, the sellers mentioned that a beautiful tree is diseased, and will die in a few years. Our obligation, as their agent, is to recommend the safest position for the sellers, and that position is to disclose the defect. Ask the sellers to think about what they would want to know if they were the buyer.

Thorough and complete disclosures are a risk reduction measure for sellers. If the sellers knowingly concealed a defect, or appeared to have concealed a defect, they might be vulnerable to a serious claim by the buyer after the closing. If you think that the sellers might have a duty to disclose something to a buyer, advocate for disclosure. This is a part of your obligation to represent the best interests of the seller, both for the short term and long term.

Recommend Inspections

Inspections are a protection measure for both the seller and buyer. Although inspections are normally obtained and paid for by the buyer, the inspection protects the seller as well as the buyer. The inspection will reveal items that the seller was not aware of, or did not think to disclose. (Yes, water runs into the garage, but we never considered it a problem.)

Sellers should consider getting a pre-marketing inspection. This will help them to get prepared for marketing, avoid surprises later, and build buyer confidence in the property.

Avoid Acting as an Inspector

During visits to the house, avoid attempting to assess problems for the seller. (Those cracks are not from settling. Or, all homes in this area have some slope in the floors.) All questions of this nature should be referred to an inspector, engineer, or construction specialist. You are not the interpreter of maladies. Home inspection is a difficult job to do perfectly, even for trained professionals.

Include Service Contracts

I often recommend that the seller and buyer have a service contract included in the contract. These policies provide a one year repair service for the buyer. They can often reduce the potential that a future repair issue will cause them frustration and anger toward the seller.

Do Not Allow Misinformation to Stand

Be alert to potential problems that could result from a misunderstanding of disclosure requirements or of the property itself. For example, the sellers may mention something that they do not consider to be a problem, and have no intention of disclosing. (We fixed all the sheetrock cracks. Or, it flooded once a long time ago.) If you let this pass, your silence may be taken as approval of the non-disclosure. In the event of a problem later, they might feel that you advised them not to disclose the item. A common response by sellers to a lawsuit by the buyers is: My agent told me not to disclose this.

Similarly, speak up if you feel that the buyer is making an erroneous assumption about your client’s property. (We love the greenbelt behind the house.) The best representation for seller is proactive.

Open Communication

An open line of communication during transactions is a good defense against misunderstandings. No matter who complains, a quick response is more likely to resolve the problem before it escalates. People need to feel that their concerns are being heard. Many problems can be avoided and anger kept to a minimum by simply being in communication. Emotion often drives the escalation of a problem.

The communication and file storage power of email is a great tool to help you fulfill your duties to your clients. It is a good idea to save the complete file of messages relating to a transaction. If a decision has been made verbally, it is easy to send a quick note by email to place it into the email file.

When new information about the property is delivered to the buyer, an email follow up will document the file. While it is important to provide accurate information, it is also important to document.

Set Standards

Set your own standards, and do not allow other people to run your business. This includes clients, other agents, lenders or any other party. Walk away from deals, rather than get entangled in unethical or imprudent activity. Not all clients are a good fit for your business. Select good clients; walk away from bad ones.

Good business practices include a proactive attitude toward property disclosure, and a system of communication and documentation. They will help you to fulfill your obligation to put the best interests of your seller clients first, as well as to treat other parties fairly and honestly.

Roselind Hejl is a Realtor with Coldwell Banker United in Austin, Texas. Her website – Austin Texas Real Estate offers homes for sale, market trends, buyer and seller guides. Let Roselind help you make your move to Austin, Texas. Austin Real Estate Guide

Tags: Better, Representation, Seller, Tips

Explain Foreclosure Options to Your Seller to Gain the Winning Edge Over Your Competition

People who are in foreclosure and are distressed need help in resolving their situation. They are looking to us for answers and options. They are yearning for someone to come along and share with them solutions to help them out of their situation. Well, here are some options that you can share with your seller:

1. Loan Modification: The seller may be able to refinance the debt and/or extend the term of their mortgage loan. This will help the seller catch up by possibly reducing the monthly payments to a more affordable level. They may qualify if they have recovered from a financial problem but their net income is less than it was before the default (failure to pay). The interest rate could change or the actual product may even be converted (like the case of an ARM turning into a fixed rate). Usually, the banks don’t readily perform a modification unless there are very good reasons for them to do so.

2. Partial Claim. The lender may be able to work with the seller to obtain an interest- free loan from HUD to bring the seller’s mortgage current. They may qualify if: 1) their loan is at least 4 months delinquent, and no more than 12 months delinquent; 2) their mortgage is not in foreclosure; and 3) they are able to begin making full mortgage payments. When the seller’s lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay the lender the amount necessary to bring their mortgage current. The sellermust execute a Promissory Note, and a Lien will be placed on their property until the Promissory Note is paid in full. The Promissory Note is interest-free, and will be due if they sell or leave their property, or when their mortgage matures.

3. Reinstatement of Loan (Cure): Cure and reinstatement simply means to cure the default in the seller’s mortgage loan by paying the amount of missed payments, plus late charges, costs of collections, etc., which results in a reinstatement of the mortgage loan as if no default had ever occurred. You can help the homeowner arrange for cure and reinstatement of the mortgage loan for substantially less than the actual cure amount! Since foreclosure laws vary from state to state, the time period during which cure and reinstatement is an option will depend on where your property is located.

4. Short-term forbearance. This allows for the suspension of up to three payments, or a reduction in payments due for up to six months, to help the seller get back on their feet. After the forbearance period is up, the seller must agree to a stretched-out repayment plan covering all the payments you missed.

5. Long-term forbearance. It’s the same idea as short-term forbearance, but deals with more serious delinquencies and allows suspension or reduction of payments for four and 12 months.

6. Special Forbearance. The lender may be able to arrange a repayment plan which would be based upon the seller’s financial situation and may even provide for a temporary reduction or suspension of the seller’s payments. They may qualify for this if they have recently experienced an involuntary reduction in income or an increase in living expenses. They must have also furnished information to the lender to show that the would be able to meet the requirements of the new payment plan.

7. Deed-in-lieu of foreclosure. As a last resort, the seller may be able to voluntarily “give back” their property to the lender. This won’t save your house, but it will help their chances of getting another mortgage loan in the future. The seller can qualify if:

1) they are in default and don’t qualify for any of the other options;

2) their attempts at selling the house before foreclosure were unsuccessful;

3) they doesn’t have another FHA mortgage in default.

8. Cash Sale: This all depends on the seller’s equity. This is when the seller gets cashed out on his/her property and everything is paid in full. Obviously, that means you will need to get the property at a substantial discount in order to make this a good cash investment.

9. Short Sale: The borrower makes an agreement with the investor to sell it for less than is actually owed, subject to approval of the lien holders. This generally results in no cash to the homeowner, but will be better for his credit than a completed foreclosure.

10. Refinance: The borrower may be able to refinance and get a new loan, but generally this is difficult because the borrower has little equity and poor credit by the time the seller gets to this point of the foreclosure. The new loan most likely will have higher payments than the old loan so this won’t solve the problem of making the monthly payments.

11. Do Nothing: Sometimes I get a seller who is still in denial or would prefer to let the bank take the house rather than work with an investor who stands to make a profit. Obviously, this means the seller’s credit will be ruined–their credit score could actually be decreased by about 250 points in the case of a foreclosure. Furthermore, the lender could incur a deficiency judgment against the seller to collect the balance. The seller could remain the house for a few more months and save up some money but surely the bank will not give them any cash at the point the property is auctioned so this is the least desirable result.

When you invest in foreclosures, you need to have the right attitude. The more honest, sympathetic and understanding you are with the homeowner, the better you will be able to build a good rapport and build trust. I talk about this in the ebook http://www.ForeclosuresUnleashed.net. Remember, seller’s want to do business with people they feel they can trust and like. Offer honest solutions. Think in terms of what is best for the other person and you will richly rewarded in the long run.

Tags: Competition, Edge, EXPLAIN., Foreclosure, Gain, Options, Over, Seller, Winning