Buying a business is no small feat, and what many business owners fail to consider when selling is the struggle for the buyer to find financing. Buyers don’t come to the table with cash in hand ready to buy, or if they do it is a very rare circumstance. The first and most important hurdle for a buyer to overcome is financing. Oftentimes these funds cannot be secured until the buyer has found the right business and embarked upon the due diligence process. It is only when the buyer has decided upon the business they are purchasing and taken their knowledge to potential lenders that they will discover whether or not they are bankable. Understanding this is not only imperative to the buyer, but to the seller as well. Imagine, you are ready to sell your business and the buyer is more than keen but then cannot secure the financing to move forward. More often than not it is a deal breaker and the sale falls through, leaving everyone to start the process from scratch once again.
Let’s take some time to break down the types of financing that a buyer usually has available to engage with, and the steps a seller can take to help this side of the deal flow more smoothly.
Buyer financing can be broke into three major categories, each with benefits and drawbacks:
Type of Financing |
Pro’s |
Con’s |
Traditional – Financing acquired from a bank. |
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Non-Traditional – Loan individuals I have no idea how to define this. |
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Vendor Financing – Financing supplied from the business owner in the form of a slower buyout period. |
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Because financing can be such a barrier to buyers, it is also an important component to sellers as well. Without financing, a deal cannot close. The way the seller prepares themselves for a sale will dramatically impact the bankability of the buyer. Here are a few things a business owner should consider when getting their business ready to sell to help with the financing process:
Books in order
Having the books in order goes a long way, longer than one might think, when selling a business. By proving the profitability of the business, demonstrating where certain aspects may have struggled, and teasing out personal expenses, potential lenders will get a better picture of what they are lending for. When asking for financing, it is all about mitigating risk. Having a clear picture of the business finances will help the buyer to demonstrate that the business is a good investment and that they will be able to pay back their loans.
Realistic Expectations
Many business owners place a decent amount of value on the good will of the business. Good will is the established reputation of the business within its community, and while it is certainly valuable, it is not bankable. It is near impossible to quantify goodwill in a way that helps to mitigate the risk of purchasing a business, and it is an element that can very easily change once the business changes hands. As such, money lending institutions will not lend for the purchase of goodwill. Knowing ‘what you have’ as a business owner can mean swallowing some hard truths about the business itself, including what is seen as valuable to others and what is not. If a majority of the business relies on these harder to measure components, it is wise the seller is ready to consider options like vendor financing to help the transition to occur.
Valuation
A third party business valuation is one of the best ways to show what a business is worth from the perspective of someone who is not emotionally or financially invested in the business itself. This demonstrates the willingness of the business owner to have an objective and in-depth assessment of the business, revealing everything and hiding nothing. While not all business owners will need to seek this path, it is one that most certainly needs to be considered.
Financing to buy a business is a big hurdle to overcome and, contrary to what might seem intuitive, just as much the responsibility of the seller as it is for the buyer. If both parties are aware of these challenges, then it takes the transition a few strides closer to the finish line. If you are a business owner wanting to set yourself up for success in this department, or a buyer looking to explore all of the options, don’t hesitate to reach out!