Issues and Financing a Business Sale

Once you have determined a new value for your business, if the buyer has offered a new price that is higher than what you have arrived at- accept it straight away: but show some hesitation to make it look as if they have twisted your arm! If their new offer is much lower than what you feel is fair, then you should present your valuation of the issue to the potential buyer. If they still refuse to offer a price that compliments your request, then it is down to negotiation to reach a mutual agreement. This could take time but remain strong: a sign of weakness will give the potential buyer an advantage.

6d) Financing the Sale

One of the most important aspects of selling is how the buyer will pay for your business. It is very uncommon for a seller to receive a full payment for the business on the day of closing the deal and so there are a number of alternatives to be considered. How the buyer will pay for your business will be often discussed and agreed earlier, say, when you are qualifying buyers, but now is the time to set it in stone. A seller usually offers finance to the buyer because it gives them reason to get a higher price for the business and it can often speed up the selling process. On the buyers behalf, they will benefit from seller finance and is usually strongly recommended by their advisors. However, for the buyer, they must be prepared to pay for such financing either through interest or for having personal assets used as security. Your only concern will be the risk that it involves.

Seller Financing

The buyer will give a down payment of, say, 10 – 50% of the total purchase price at the time of closing the deal. The rest of the money will be paid back to the seller in monthly or quarterly instalments with interest. This method is usually the most common way of financing the sale but is also quite risky for the seller. As a result, the seller should tie the loan to business assets or stock as insurance. In the fear of the buyer failing to run the business successfully, consequently reducing the value of the business, the seller may also decide to tie the loan to the home of the buyer (known as blanket lien). This type of financing should be set up by a solicitor and all legal documents should be carefully examined.

Bulk Payment

A bulk payment allows the buyer to pay the full amount at a later date instead of paying the money in regular instalments over the same period. For example, a buyer may pay the full amount of £120,000 after two years instead of paying monthly instalments of £5,000 over the same time. This is very risky as the buyer may fail to produce the money at the agreed date where any issues on monthly instalments can be corrected within good time.

Stock Share

If you sell to another business, they may offer you some of the value in stock. This is one of the most risky methods of finance as it may take some time to sell the stock or perhaps never at all. If stock is involved, make sure that it can be easily (and quickly!) sold, but also make sure that the majority of the finance for your business is paid to you in cash.

Earnings Payout

If a buyer is uncertain of the future performance and profitability of your business, it is common for them to suggest this finance method. In addition to a down payment, the buyer will pay the seller a proportion of the sales revenue (not profit), say, each month for a given period of, say, three years. This gives the buyer insurance that they are paying for what they get, and it allows you to increase the money you expected for your business should the new management be inspirational to increased sales.

Salary Agreement

The total price of the business can be paid out to the seller in instalments that take the form of a salary. Depending on how much the business is sold for, the seller will receive an income until it has covered the expense of the purchase.

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