How sellers can protect from getting their business back, after they sell it

Two questions sellers ask… “How much is my business worth,” and “How can I protect myself so I don’t get the business back later?

In many ways, the latter question is more sensitive issue than the first.  An improperly structured transaction can create problems for the seller years after he has sold the business. 

Although there are no guarantees, a combination of the following recommendations will significantly reduce the likelihood that the seller will be stepping back into the business after stepping out.  Many of these suggestions, such as having an adequate training period for the new owner, having a good client base, having strong relationships with suppliers, etc. are obvious.  However, many are not. 

One of the most common mistakes sellers make is not getting enough of a down payment.  One of the best ways to ensure the successful transition of their business is to have the buyer invest a significant amount of their own capital in the transaction.  Few incentives inspire the new owner to achieve success greater than the risk of the loss of a significant amount of their own money.  In simple terms, it is a lot harder to walk away from a $150,000 down payment than $15,000.

Another way to minimize a seller’s risk is to know their buyer.  This goes beyond having some of the same interests, common friends and an affinity for the same brand of Cabernet.  It means a thorough review of the buyer’s credit, analysis of their personal finances and a complete resume illustrating, not only their accomplishments but their life experiences.  For example, if the buyer has a poor history of paying off his credit card, he likely might have problems making his monthly principal and interests payments to the seller on a timely basis.  If the buyer doesn’t have a strong financial statement, he may not be able to weather any unexpected slow periods. 

As far as life experiences go, the passion and skill sets that are required to run a day care will be significantly different than what would be needed to operate a manufacturing business. 

Finally, securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine.  A qualified facilitator will structure the transaction to ensure that potential potholes are covered. 

By incorporating these obvious and not-so obvious suggestions, business sellers will be able to significantly increase the likelihood that they won’t have to come back into their business once they have left.

Do you have small business questions you would like answered about this article or others?  Please visit www.VRWindsor.com or call 519-903-7807. 

William Sivell is a Broker at VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.

 

Minimize risks when selling your business

Whenever I meet with business sellers, they want to know how to protect themselves in a way in which the new buyer meets the financial obligations and a smooth transfer of ownership occurs.

For many sellers, protecting themselves is more important than determining the value of the business.   What sellers need to keep in mind is that there is just as much risk in selling a business as there is starting a business.

Similarly, they can minimize their risk when selling as they did when starting the business.

Although there are no guarantees, a combination of the following can significantly reduce the risks to an owner selling their business.

Many of these suggestions, such as having an adequate training period for the new owner, having a good client base, having strong relationships with supplier, etc. are obvious.  However, many are not.

One common mistake is not getting enough of a down payment.  Few incentives inspire a new owner to succeed like the risk of a significant loss of their own money.  In simple terms, it is a lot harder to walk away from a $200,000 down payment then a $20,000 down payment.

Know the buyer.  This means more than having some of the same interests, common friends and a shared love of the Toronto Maple Leafs.  A seller needs to thoroughly review the buyer’s credit history, personal financial situation and accomplishments and life experiences.

A well-intentioned but common error sellers make is having a due-on-sale clause in the promissory note.  In some cases, buyers find that being a business owner is not what they thought it was going to be, or something has occurred in their life which has changed their desire to own the business.

This is exactly what happened with a home-improvement contractor.  An out-of-town family matter for the new owner forced the owner to leave the area.  Instead of closing the business without meeting his financial obligations to the original seller another buyer could be found to meet his conditions as well as the obligations to the original seller.  For the original seller, this meant that instead of having one buyer on the promissory note, he now has two.

Finally, securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine.  A qualified facilitator will structure the transaction to ensure that potential potholes are covered. 

By incorporating these obvious and not-so obvious suggestions, business sellers will be able to significantly increase the likelihood that they won’t have to come back into their business once they have left.

Do you have a small business question you would like answered about this article or others?

Bill Sivell is a salesperson with VR Windsor Inc. [www.vrwindsor.com] 519-903-7807, which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. His blog appears every Tuesday.

Dispelling the myth about seller financing

It’s probably not surprising to learn that the first question most business owners will ask is “How much is my business worth” , however, often times more sensitive to the seller are fears about “seller financing” the sale of their business.

A popular myth is that sellers should always press for an “all-cash deal”.   The problem is Buyers will interpret this stipulation as a lack of confidence in the business, the buyer’s chance to succeed or both which can seriously diminish the chances for a deal. 

A seller who wants to proceed in this manner should take a hard look at the benefits associated with seller financing….

Firstly, it increases the pool of prospective buyers. 

Secondly, sellers will not have to discount their sales price.  Also the interest on a seller financed deal can be substantial.

Finally, another benefit is due to low interest rates, sellers can get a higher rate from a buyer than they could from a traditional financial institution.

What sellers need to realize is that just like there are risks with owning their own business, there are risks with selling it.  Similarly, just like they can minimize their risks when starting a business, they can also minimize their risks when selling it.

Securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine. Although there are no guarantees, a combination of recommendations from a qualified facilitator will structure the transaction to ensure that potential potholes are covered.

Do you have small business questions you would like answered about this article or others?  Please visit www.VRWindsor.com or call 519-903-7807. 

William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.

Why is Seller Financing so Important?

Recently, in a discussion with a business owner the subject of financing the sale of their business was a ‘hot topic’. The truth is, an improperly structured transaction can create problems for the seller years after he or she has sold the business.

Firstly, many potential buyers don't have the necessary capital or lender resources to pay cash for a business. Even if they do, they often want to leverage it into buying a larger business with greater cash flow.  When a seller demands cash, buyers interpret this insistence as a lack of confidence in the business, the buyer's chance to succeed, or both.

This interpretation has some basis in fact. The primary reason that sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease making the payments, the seller would be forced to take back the business.

The seller who operates under this fear should take a hard look at the positives associated with seller financing:

1) Seller financing increases the chances that the business will sell. Making the terms attractive and attainable increases the pool of qualified buyers.   A seller offering terms will command a much higher price. Buyers paying cash will demand a discount.

2) The interest on a seller-financed deal will add to the actual total sales price.   With interest rates currently as low as they are, sellers can get a much higher rate from a buyer than they can get from any financial institution.

3) The tax consequences of accepting terms can be advantageous when it comes to the Seller’s capital gains.

By lending a helping hand to the buyer, you can help yourself as well.
Finally, securing the services of a good business broker to help the Seller navigate through the structure of their business sale can be good preventative medicine.  Although there are no guarantees, sound guidance when it comes to down payment, debt service and buyer due diligence can go a long way to maximize your sale price and minimize the likelihood of getting the business back after it is sold. 

Do you have small business questions you would like answered about this article or others?  Please visit www.VRWindsor.com or call 519-903-7807. 

William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.

Protecting your interests after selling your business

Besides asking “How much is my business worth,” the second question all owners want answered when selling their business is, “How can I protect myself so I don’t get the business back later?

In many ways, the latter question is more sensitive issue than the first.  An improperly structured transaction can create problems for the seller years after he has sold the business.  For example one Windsor owner, who had been in the home improvement business for 25 years, decided to sell.  He found a willing buyer whose enthusiasm to have his own business unfortunately exceeded his abilities to run it. 

After 18 months, the new owner decided that the rewards of owning the business weren’t worth the time or the effort and decided to walk away from his responsibilities, both of running a successful business and paying the previous owner. 

What sellers need to realize is that just like there are risks with owning their own business, there are risks with selling it.  Similarly, just like they can minimize their risks when starting a business, they can also minimize their risks when selling it.

Although there are no guarantees, a combination of the following recommendations will significantly reduce the likelihood that the seller will be stepping back into the business after stepping out.  Many of these suggestions, such as having an adequate training period for the new owner, having a good client base, having strong relationships with suppliers, etc. are obvious.  However, many are not. 

One of the most common mistakes sellers make is not getting enough of a down payment.  One of the best ways to ensure the successful transition of their business is to have the buyer invest a significant amount of their own capital in the transaction.  Few incentives inspire the new owner to achieve success greater than the risk of the loss of a significant amount of their own money.  In simple terms, it is a lot harder to walk away from a $150,000 down payment than $15,000.

Another way to minimize a seller’s risk is to know their buyer.  This goes beyond having some of the same interests, common friends and an affinity for the same brand of Cabernet.  It means a thorough review of the buyer’s credit, analysis of their personal finances and a complete resume illustrating, not only their accomplishments but their life experiences.  For example, if the buyer has a poor history of paying off his credit card, he likely might have problems making his monthly principal and interests payments to the seller on a timely basis.  If the buyer doesn’t have a strong financial statement, he may not be able to weather any unexpected slow periods. 

As far as life experiences go, the passion and skill sets that are required to run a day care will be significantly different than what would be needed to operate a light manufacturing business.  This is what happened with that Windsor home improvement business owner.  Although they shared many interests, the buyer didn’t share the seller’s passion for customer relations which was so important to the success of the company.

Another common error sellers make is having a due on sale clause in the promissory note.  In some cases, buyers find that being a business owner just isn’t what they thought it was going to be or that they can’t successfully operate the business and they just don’t want it anymore.   A smart seller will give them the opportunity to resell it to someone else who will operate it effectively.  As long as the original seller reviews and authorizes the second buyer, he can ensure that his payments will continue to be made.  Additionally, instead of having one buyer listed on the promissory note, he now has two!

Finally, securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine.  A qualified facilitator will structure the transaction to ensure that potential potholes are covered. 

By incorporating these obvious and not-so obvious suggestions, business sellers will be able to significantly increase the likelihood that they won’t have to come back into their business once they have left.

Do you have small business questions you would like answered about this article or others?  Please visit www.VRWindsor.com or call 519-903-7807. 

William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.