There was an interesting article the other day in a small business magazine. The article stated that a survey was done of all the websites listing businesses for sale. The analysis of those listings showed that less than 20% of the businesses on the market were using Tax Returns as the source document for financials represented on the businesses in question. While that statistic may shock some of you for those of us in the business it is very much the norm.
The reality is that small business owners operate in a very tough environment and they get taxed to death. This issue coupled with the lack of realistic lending practices from banks drives operators to do some ‘creative things’ with their books and records. I am neither condoning nor am I advocating such behavior….but I do understand the reasons why.
Here are some basic things for buyers and sellers to recognize when it comes to Seller Financing:
> The risk goes both ways, lending money to a buyer who has never operated a business as an owner and or run a small business is risky ; conversely buying from a stranger who has less than clean books, no contracts, and no financing capacity is just as risky.
> If financing is not offered you are decreasing your likelihood of selling by 40%. Given that less than 20% of deals ever sell….not offering financing dooms you never selling in reality
> What is clear to you as a seller is not clear to a buyer! 90% of buyers buy in an industry they have no experience in (fact). Given that fact when you prep your business for sale it should have the clearest numbers with as minimal personal expenses in the business….again what is obvious to you will not be obvious to others.
>Clean books means easier financing, means buyers can leverage into larger cash, means higher price
>Owner financing means you as a seller get to charge points and a premium for risk
>Owner financing means buyers don’t get to discount and ask for financing (there are tons of buyers out there)
> Owner Financing is the only way other than favorable allocation of the purchase price to mitigate the capital gains taxes on the sale
> You don’t get to beat Uncle Sam 2x…..if (and I’m not saying I see this) you skim off the top (illegal) don’t think the buyer is going to pay you for it as its not provable.
> For heavy goodwill businesses you can generally see a seller finance the value of the assets remaining in the business (cars, equip, etc)….in essence the seller is hedging risk against assets.
The bottom line is that buyers and sellers have to meet in the middle. Have to understand the risk. Sellers by financing send a signal to the market that they are reasonable and negotiable….recalcitrance is a bad thing in business sales. Buyer, do not be fooled into thinking that you have the upper hand….your peers have made everyone skeptical of you….99% of buyers never buy so be courteous of brokers and sellers time and respect the process. Seller financing will be part of your deal. You are not the only buyer out there….remember that.\\
