I have decided to write this article about the keys to selling a business, as I get really frustrated with vendors of businesses and with brokers that do not seem to know what they are doing!
Today, for example, I emailed a broker regarding the purchase of a business that they were advertising – ‘Offers invited for a quick sale’, which turned out not to be the case – so business sales brokers need to get their act together.
Secondly, business owners and business sales agents need to get to grips with what vendor finance is, as not many are aware of this, including brokers and to know about it and to accept it as a part of the sale price is crucial to ‘Get your Business Sold. The above same broker did not fully understand the term vendor finance either.
Another way to describe vendor finance might be ‘buy out’ or ‘earn out’, which all amount to the same thing – the vendor of the business is effectively lending to the buyer in order to get the business sold.
Of course the terms of such lending or ‘earn out’ must be agreed to by both parties and can include the charging of interest and it can also be aligned to the business achieving certain results. To protect yourself as the vendor, the earn out or ‘Loan’ should be secured against the business, so that should the buyer not pay up, then you get the business back. You might think that this is a problem, but so long as the new owner has not completely ruined your business in the interim, and so long as you got some money up front, you now have the business to sell again.
I would always suggest that buyers of businesses look at the one third rule: one third own capital; one third bank finance, and; one third vendor finance.
The important thing to remember is that you are ‘Selling your Business’ and for a reason and if it sits on the market for months or even years (which of course does point to an over valuation), you are not achieving your goal. By allowing a staggered payment structure to your business sale you are more likely to make a sale, as you open it up to a larger audience that might not have all the capital or borrowing powers.
The business sales market is always in the buyers favour the majority of the time any way, as the are always thousands of businesses for sale and only a few buyers in comparison, so why not make it easier for the few that there are. Treat a potential buyer with respect and as if they are like gold dust – make the buying process easy for them and make sure you have all the information, like accounts etc. to hand when it is asked for.
When you come to sell your business – ask your broker if he understands vendor finance or staggered payments, if he looks at you blankly or advises against this then I suggest you get yourself another broker.
If you have a question on this subject please register at our business forum and let us know ‘Business vendors’ and ‘Business Buyers’.
An excellent review of vendor finance, small business owners especially contractors need to understand, an earn out gets buy in from both buyer and vendor, and allows the take over to be smooth and both people to have an interest, whilst minimising both risks.
Thanks for an informative and useful post.
I think the issue raised here about offering finance options to business buyers is a good idea, especially as the banks are relucent to lend. These options will allow many more entreprenuers the ability to buy and sell businesses more easily.
Keep in mind the viability of the company going forward if you are not incontrol if you agree to an “earn out”, otherwise you can get burned.