Secrets Of Using Seller Financing To Save A Sale, Without Incurring Additional Risk.
I had a great uncle who was a bit of an old rogue but was adept at using seller financing. He once sold the same farm three times in a row. He used seller financing, combined with a healthy down payment. When the buyers became delinquent he legally repossessed. I think he was a bit disappointed when the third buyer paid off his note. You don't want to go that far, but in his case, it was a risk free proposition.
In my uncle's case, there was little the buyers could do to the property to reduce its value. If you use seller financing, remember two things. The first is that you will be making a loan. So you need to be very business like about it. The second is that a buyer can do considerable harm to the good name of your business. Largely by willful or unwitting mistreatment of your customers. If you have to take over control of your business again, it could take you considerable time to restore it to its former strength.
However, there is a place for seller financing. Suppose you have someone extremely interested in acquiring your business. You have scrutinized his background as carefully as he has scrutinized your business. You have no disagreement on price. Economic conditions, which always play a role in the loan amount a business can support, are poor. There is a gap between the price, and the loan amount, that he is unable to bridge. He has capital that he is prepared to invest, but it isn't enough.
You believe that he is the ideal buyer for your business, based on everything you have learned about him, directly and indirectly. Everything is positive except economic circumstances have reduced the amount banks will lend, and he can't bridge the gap. This is a situation where seller financing may save the deal.
Let's assign some numbers to a hypothetical transaction. You have agreed on a selling price of $10. Due to bad economic conditions, SBA and other lenders will only go as high as a loan for $5.50. The buyer has $2.50, leaving a shortfall of $2. If you believe that the agreed price of $10 represents good value for the buyer, and he can't get the other $2 anywhere else, consider financing it yourself. After all, no one knows better than you do what your business is worth. Particularly if the price agreed to has been validated by a professional valuation.
If you intend to provide the missing financing, be businesslike about it. Take security, even though your position will be subordinate to the other lender. Agree on an interest rate that is attractive to you, and that others will also find attractive. It should be considerably higher than that available on CD's and other related debt instruments. You should make sure that the buyer has more at risk than you do. In this example, he has $2.50 at risk, and you have $2 at risk.
Consult an attorney experienced in this kind of transaction, for help in minimizing your risk. Someone with experience in seller financing will help you maximize your security. He can also give you the clearest legal path toward taking possession of the business again, should you need to. There is one other thing you will need from your attorney.
Related to that, let's explore what you can do with the loan that you plan to make. The first and most obvious is to collect payments, made up of part principal, and part interest. If the interest rate is attractive, and you have no better investment use for the money, this could be great. The only negative is that some day the loan will have been repaid, and your attractive interest payments will cease.
However, at some date in the future, you may find a better use for the loan balance remaining. You may regret having agreed to provide any seller financing. You could approach the buyer, and ask him to find some more money and pay out your loan. Perhaps economic conditions will have changed, and the business can support a larger loan. He may lack motivation to do that. After all, what's in it for him?
You will probably have another alternative. If the loan document has been properly prepared, and you have insisted on a clause permitting you to transfer it to another party, you can sell the note. That's the other thing you need from your attorney. You will need to get him to make sure the note specifically provides that it can be sold.
If regular payments have been made on the original $2 note, you will not realize $2 on its sale. The remaining principal will be less than $2. Depending on the interest rate on the note, and how it compares to the prevailing rate at the time, you may have to discount the note. And take slightly less than the remaining principal. If the interest rate is extremely attractive compared to the prevailing rate, you may get the remaining balance.
There are intermediaries specializing in the sale and purchase of notes. Your attorney or accountant should be able to refer you to one, if you can't find one yourself. Knowing that you can sell notes should help you view seller financing from a different perspective. It can be an extremely helpful tool in the sale of your business.
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