CWhen a business owner sits down to talk to a potential buyer about selling his or her business, he or she should keep in mind some financial formulas that might come into play. A financial expert would say that sometimes to close deals you have to “get creative.”
The idea of “one check payment” does not always occur in all business purchase and sale transactions, so here we are going to review four alternatives to the dream payment.
- Bank financing
After the Great Recession of 2007, business owners learned to be a little wary of bank credit. There were tragic stories of bankruptcies and even suicides. Banking now feels comfortable only when companies have everything: big assets, solid cash flow, fat profit margins and owners ready to put up their personal guarantee. Although traditional banking methods have lost some of their charm, Small Business Administration (SBA) programs continue to give life to many small and medium-sized business projects. The limit for the SBA 7(a) loan program rose from $2 million to $5 million!
But be careful, these SBA credits are only for US citizens and foreigners with Green Cards.
2. Seller Financing
With banking restrictions, seller credit becomes an excellent option to close the sale of a business. Of course, it only works if the buyer trusts the seller with his business expertise and some guarantees. In this scenario, the buyer pays an initial portion (between 20% and 50%) and signs a promissory note for the difference. This promissory note details the buyer's guarantees and payment conditions, with terms of 2 to 5 years and interest rates of 5% to 10%. Typically, the loan is secured with the company's assets or stock if it is a corporation. If the seller has pledged assets, a UCC-1 financing statement is completed to make it official that the seller owes the buyer a debt.
The advantages are many: the seller can file capital gains taxes in several years and enjoy higher interest rates than the financial market. You can also dilute the payment derived from your capital gains over several tax years. For the buyer, there is more cash flow and his credit history is not affected because the transaction does not appear on the credit bureaus' radar.
3. The "Earn-Out» as Intermediate Formula
Imagine this scene in the world of trading: the seller is sure that the company's future is bright, but the buyer has doubts. This is where the earn-out, a financial move that has a random touch. Instead of paying all at once, the buyer offers the seller a bonus based on the company's future sales. The funny thing is that it is not about profits, but about sales, and it is tied to certain achievements. Add a touch of chance; If things don't go as planned, the seller can be left waiting for the bonus from him.
4. The Barter
And speaking of interesting moves, here in Florida some buyers are going even further. Instead of spending cash or committing to guarantees, they propose exchanging real estate. Some buyers offer property in the United States or even abroad in exchange for the business. It's like a big deal that's taking hold in business transactions in Florida.
As De Bono says: "Creativity involves breaking established patterns to see things in a different way."
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Author: Alfredo Gonzalez (alfredo@negociosenflorida.com)
Image courtesy of Pixabay