For one reason or another, you might decide to sell your business. Selling isn’t a simple process but with many business selling options available, the process can be simpler depending on what you choose. Choosing the wrong approach when selling your business might result in dire financial consequences for you the business owner.
You might consider an outright cash sale which is usually the simplest way to sell the business. Sometimes business owners can’t get the deal closed fast enough and they therefore resort to taking a note in order to get the deal sealed faster.
Bad Note scenario
A dry-cleaning business owner wants to sell his business for reasons best known to him. Since he can’t find a buyer fast enough and wants to close the deal as soon as possible and move on to other projects, he decides to take a note as partial payment.
Unfortunately the new owners of the business don’t keep up their end of the deal and they default on the note and close down the dry-cleaning business. Unless he has insights into personal fundraising, the selling business owner is then forced to reopen in order to make the money he expected and pay off the accumulated expenses. Does that sound familiar?
Good Note Scenario
However, it is not always like that because there is a good side to selling your business on a note. When you resort to this option, the number of potential buyers goes up and so will the purchase price.
This kind of seller financing also gives the selling owner a stake in the new owner’s success which will help a lot with transition. The only drawback with this option is that the seller will get a note and not immediate cash.
How to Reduce the Risk
Just like with most finance issues, there is always risk involved. However, it is possible to reduce the risk and increase your chances of getting good cash. Some suggestions to help you are as follows:
- Get Good Cash Upfront
As the seller by making sure that you get a good percentage of the selling price upfront. When you don’t do this, you are not really selling your business but actually giving away an option. Get more than 50% so that it can be easier for you to cover the remaining amount in case the buyer defaults.
- Establish The Buyer’s Capability
You can also ensure that you get the full amount back by finding out if the buyer has all the necessary skills and qualities to succeed in the business. Of course it also wouldn’t hurt to run a credit check on the buyer, just to be on the safe side. You can also find out if the buyer owns any assets that can be used to secure the loan. When you are sure of the buyer’s capability to pay out the note you will be less worried about getting all the cash that your business is worth.
- Establish Loan Covenants
Come up with loan covenants, for example, a requirement for the buyer to maintain a certain amount of working capital or certain level of net worth. This will enable you to step in and take control at the earliest sign of the business going downhill.
You can also demand audits regularly to ensure that the buyer fully complies with the established covenants and that the business is run by the book.
The above tips will work. but you need to have a plan for taking back your business if it comes to that. You never know if worse will come to worst and it is better to have a plan in place to cushion any hard falls. You can also do research on reputable note buyers online, to have a unique customer experience as a business note seller.
Title: Super-Connector at OutreachMama
Taby is a super-connector with Towering SEO and OutreachMama who helps businesses find their audience online through outreach, partnerships, and networking. She frequently writes about the latest advancements in digital marketing and focuses her efforts on developing customized blogger outreach plans depending on the industry and competition.