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Utah Business Consultants
Financing is a common topic of discussion and negotiation during most business sales, and one particularly frequent form of financing that's often considered is seller financing. Some small business sales in particular come with some level of seller financing, and as a seller, ensuring you're knowledgeable and prepared for any such negotiations is important.
At Utah Business Consultants, we're here to help clients around Salt Lake City and other parts of Utah with every element of selling their business, from business valuation, marketing the acquisition to exit planning strategies in maximizing the sale. In this two-part blog series, we'll go over some of the most important elements to keep in mind if you're selling your business and considering the option of including any level of seller financing as part of the transaction.
One of the common questions that arises when seller financing is included in a business sale: Will the buyer be taking on any existing debts you have as the seller? In all Asset Purchase cases, particularly if your company comes with some significant assets like fixtures, furniture and equipment, or loans, these debts are paid off through Escrow from the Purchase Price of the business.
If the acquisition is a Stock Purchase, there are fewer potential paths forward here. For one, the buyer may assume some or all of this debt as part of their purchase - this is often a simpler route and helps streamline the process. And naturally, you need to think about how such debt considerations impact the overall purchase price of the business as well.
Another important question that arises: What will be the interest rate for any seller financing loans, and what lengths or terms will these loans come with? In most cases, these decisions are made based primarily on the tolerable risk level involved in the terms of your particular sale - higher-risk sales may come with higher interest rates, while lower-risk sales will often have rates closer to those found on traditional business loans.
It's also worth considering the length of the loan term and any potential balloon payments that might be included. Balloon payments are large, one-time payments that come towards the end of a longer-term loan - they're designed to help alleviate interest costs for both parties, but they can still be significant. Be sure you're accounting for these in your negotiations, if they're included.
Another major factor to consider for both parties here is collateral. This refers to any assets that are attached to the seller financing loan - they can be seized by the lender if the buyer fails to make payments and defaults on the loan.
As a seller, you'll want to ensure that any collateral is properly valued and well-secured - this helps protect your interests in case the buyer struggles to make payments. As a buyer, on the other hand, you need to be conscious of what collateral you may be putting up when taking out this loan, as well as what steps you can take to minimize risks in this area.
In part two of our series, we'll go over a few additional financing options to consider when selling your business. To learn more about any of our business sale services or exit planning, contact the pros at Utah Business Consultants today at 801-424-6300!