Finance and Transactions
For many people making a business purchase, the transaction is contingent on finding the right financing and structuring solution. At Exodus Business Solutions we know what it takes to put together the right combination to make the transaction work properly. Whether you are ready to buy a business now or are just beginning to consider selling, call Exodus Business Solutions for a confidential consultation.
Financing Options and Arrangements
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 installments 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 installments over the same period. For example, a buyer may pay the full amount of $120,000 after two years instead of paying monthly installments 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 installments can be corrected within good time.
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 installments 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.