The need to use seller finance when trying to sell your privately held company has come back into vogue due to the lack of third party finance being readily available. Some techniques less known and used, however, are available but require a clear understanding between the seller and buyer and may then need good legal agreements to clarify, protect and define the responsibilities of each of the parties. Here are five options both a seller and buyer may want to consider.

Option One: if the seller of the business has created intellectual property or some proprietary idea that they don’t wish to sell as part of the business transfer, but the buyer needs that knowledge or invention in the business, the seller and buyer can enter into a licensing agreement. The buyer would pay an agreed fee as a royalty.
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The need to use seller finance when trying to sell your privately held company has come back into vogue due to the lack of third party finance being readily available. Some techniques less known and used, however, are available but require a clear understanding between the seller and buyer and may then need good legal agreements to clarify, protect and define the responsibilities of each of the parties. Here are five options both a seller and buyer may want to consider.

Option One: Allow the buyer to assume the sellers credit. Both parties need to be clear on their roles and responsibilities, but if the buyer is able to run the business and continue to buy all inventory or other items the seller always bought and paid so they earn a high credit rating, this can make the transition of the business easier to the buyer. If this method of financing is considered, an agreement should include a separate indemnification clause between the seller and the buyer making the debt the ultimate responsibility of the buyer. Using a good attorney is best to prepare this legal document.
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Seller finance that will enable a transaction to close between a business owner and a buyer in today’s economy has become a very important consideration in most business transactions; especially for privately held companies.  It’s become important not only because the banks have reduced their amount of lending but also because the banks are now reluctant to loan as much of the purchase price.  For example, if the buyer brought a down payment of 20 per cent the bank was willing to lend the remaining 80 per cent.

So the good old days are now behind us with the banks now preferring the buyer to bring a down payment of 20 per cent, the seller to carry a note of 20 per cent and the banks will then fund 60 per cent as long as the seller moves into second position.

This change of dynamics is making it difficult for sellers to decide if they really want to sell.  Many sellers are reluctant to carry a note because they are worried the buyer will not make that payment to them or the conditions of the loan may mean the seller does not start to get paid until 3 or 4 years after the transaction closes escrow.

There are down sides to seller finance but there are many upsides.  Let’s have a look at a few of them.
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The Small Business Administration’s 7(A) Loan Guarantee Program has recently gone through some modifications and changes. These changes include an increase in credit availability for owners of companies with purchase prices between $400,000 and $4,000,000.

The SBA 7(A) program helps small entrepreneurs start or expand their businesses with loans through bank and non-bank lending institutions. Previously the loans only allowed a maximum of $250,000 in intangibles (including goodwill) to be financed. However, under the revised rules, it is now possible to finance any amount of goodwill (even up to this program’s lending limit of $2,000,000), as long as at least 25 percent equity exists in borrower down payment and/or seller stand-by financing.

There is more good news, in that the SBA has temporarily increased its guarantee from 75 percent to 90 percent of the total loan amount, and currently waives the guarantee fee (2.6 percent of the loan amount) charged to borrowers.
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The best approach when selling your business is to make a list of all the items so there is no confusion about what is being sold. This includes isolating and reporting individually any real estate, inventory, fixtures, furniture and equipment, leasehold improvements, as well as assets that are not part of the sale.

Additionally, consider making a list of the current liabilities of the business and against that list, note whether it will expire when the business changes ownership, stays with the seller or will transfer to the buyer. Also, a better idea is to completely remove any personal or special items that will not be sold as part of business. This removes any ambiguity and becomes one less tension point in the transaction.

Once this is done, one of the first steps to selling the business is to get an appraisal on the business as a going concern. If you’re the owner of the business you may have an opinion about what the assets are worth but that opinion will not be acceptable to a genuine buyer. The best approach is to have a third party perform the appraisal for you.
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If you are thinking of selling your business, one of your first questions to answer is more than likely; where do I start?

One of your first starting points is to be clear exactly what is being sold. This may seem obvious but many Sellers think they will deal with it when they get an offer. So let’s break this down and look a little more closely at it.

The two most important things to a buyer when looking to acquire a business, is current cash flow and the potential of the business. From the buyer’s perspective, the cash flow is the fuel that feeds the business to pay the suppliers, employees, landlord, tax man, lenders and of course, leave something left over for them after all their work and capital investment in the business.

For the buyer to achieve the above, they need to purchase all the assets of the business so they understand what each asset does and how it contributes to the cash flow and/or potential of the business. As the seller of the business, it’s therefore important that you make it clear what those assets are and present them in the best possible light.
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The current recession in 2008 and 2009 is marked by how low the economy has gone, the increase in unemployment but most frustrating of all, how long it has taken before the “green shoots” appear. If your business is struggling and you think your only option is to close the door and hand the keys back to the landlord, here are some things to consider.

If the business has excess fixtures, furniture and equipment, turn those items into cash by selling them. There are plenty of options to selling the goods including eBay and Craigslist. Make sure what is being sold is as presentable as possible but again, get some cash into the business and move unwanted items. This could include vehicles and real estate and other excess items. Hopefully the business has a current list of fixtures, furniture and equipment. If a list doesn’t exist, there is your starting point as you may be surprised what you have stored away.
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This current recession in 2008 and 2009 is marked by how low the economy has gone, the increase in unemployment, but most frustrating of all, how long it has taken before the “green shoots” appear. If your business is struggling and you think your only option is to close the door and hand the keys back to the landlord, here are some things to consider.

First, it’s rarely as simple as closing the door and handing the key back to the landlord. If your business has a lease you obviously need to discuss the situation with the landlord. If you have a good relationship and feel you can handle it on your own to save hiring help, take care as you handle the issue. Bear in mind the landlord is no different to you. They lease the real estate to make money. If you close the doors, they need to find a replacement for you which may take time to achieve. This can be a talking point with the landlord as you may be able to bring a tenant to replace you. If this is the case, make sure this is correct as the landlord may become frustrated if the person changes their mind. Similarly, the landlord is not required to accept the person you bring so be aware the landlord has options.
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There is no doubt that the current recession is as long and as hard as we’ve seen for many years. And hopefully we will not get to see again for quite some time. If you are a business owner whose business is not making a profit and you don’t have the capital to invest and keep the business, going you may be wondering about your options.

The first option is to take a real assessment of where you are at. One of the best ways of doing this is to talk with your accountant. Make sure your accountant is not simply filing your tax return to meet compliance but actually helps you look behind the numbers and understand how your business is performing.
What do you need to know?

Most business owners understand their gross sales. Some are adept at using this number to explain the success of their business. For example, have you spoken to a business owner that said “Sales are up 20% on this time last year.” They say this with great pride but that doesn’t tell the full story.
Some business owners can tell you the net profit of the business. Net profit is simply what they pay taxes on or gross sales less cost of goods less expenses. Some business owners like to say “Our bottom line was up 10% compared to last year.” This is good news but that doesn’t tell the full story.
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An area that a lot of businesses don’t spend a lot of time measuring but is very easy, cost effective and critical to do is the key performance areas of the business.  These key performance areas or metrics can show whether the business has all the parts working together and in a healthy manner or is in need of a tune up or radical surgery.  There are a number of key areas to a Performance Plan so let’s break them down.

The first area to look at is the financial statements of the business.  The first and most readily used is the Profit and Loss Statement as it shows the income and expenses of the business with hopefully the income greater than the expenses.  Just as important, however, is the Balance Sheet as this document shows the wealth of the business.  With an up to date profit and loss statement and balance sheet, a trained business appraiser can then calculate what the owner of the business could expect to get if they decided to sell it on the market.
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