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Take it to the Bank: Buying and Selling a Business

May 24, 2012

Some of the first questions potential buyers ask a business brokerage specialist are: “How much is it?” “How much can I make?” And then, “How much money do I need to buy it?” Many sellers expect, or at least want, an all-cash sale. Interestingly, when asked if they paid cash when they purchased the business, most respond with a “no”. Most business sales are financed either by an outside source, by the seller or most often both. ‘Seller Financing’ also known as ‘Vendor Take Back’ has several pluses:

1. There is a better chance the business will sell.

2. Sellers usually receive a much higher price when willing to finance a portion of the sale.

3. Interest realized from a seller-financed note can substantially increase the total paid for the business.

4. Seller financing may provide a higher rate of return than conventional investing.

5. Positive tax consequences are, in some cases, another benefit of seller financing.

6. Financing the seller tells the buyer—and the bank—that a seller has sufficient confidence in the business.

7. Without vendor take back, many banks will not agree to finance, or will fund only a fraction of what they would otherwise.

Other than needing the cash to purchase another business, the biggest obstacle to seller financing is the seller’s concern that the new owner can pay off the loan from the profits of the business. Some sellers check the buyer’s work history, obtain personal references and a credit report. Creative financing can also be helpful. Example: a toy store does 40 percent of its business in October, November and December. Make financing payments higher in those months and lower in the summer. Seller financing or vendor take back has been the mainstay for many successful business sales.

How the sale is structured is important to the best deal for the buyer and seller. A professional business broker can be the key player in accomplishing this goal. Business brokers can’t provide legal advice, but their deal-making knowledge and experience can greatly assist in ensuring a win-win transaction.

If you are interested in exploring business opportunities or are contemplating the sale of your business, feel free to contact our office.

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