How to Get Paid When You Sell
7 Ways to Secure Seller Financing: How to Get Paid When You Sell
Sellers finance 90% of all small business sales. Buyers nearly always need seller financing. Their advisors strongly recommend it. Offering seller financing puts you, the seller, in a stronger position to get a fair price and a faster sale.
But, you may ask: “How can I be sure I will get paid?” It is an understandable worry. Even though the odds are probably 95% in your favor, it is still possible for a buyer to fail at the business, default on the seller note and declare bankruptcy. It does happen.
Here’s an overview of the seven best ways to protect yourself when you offer seller financing.
Play Bank If You Can
If you can provide all of the financing that is needed, do it! It pays to play bank.
By eliminating the need for bank financing, you will take the first place claim on assets. You will also shorten the time it takes to complete the sale and you will help avoid the affects of negative comments that may be made about your business during a buyer’s attempt to get financing elsewhere.
Financing the entire transaction (except, of course, for the amount of down payment), you will also gain some favorable tax treatment in the deferral of capital gains taxes and realize additional interest income.
Collateralize All Assets
Be sure to take a security interest on all assets of the business you are selling, not just tangible assets. The law allows you to collateralize your seller note with intangible assets as well.
Claim an interest in the business name, records, customer list, computer files, accounts receivable and even cash!
If there is a bank involved, it will nearly always insist on the first security position on the tangible assets: the furniture, fixtures, equipment and inventory.
But, even if you take only a second position to the bank, make sure that your attorney fills in the UCC-1 filing form claiming your security interest in all of the business tangible and intangible assets that you can think of listing.
Get A Personal Guaranty
Get a personal guaranty of the buyer and of the buyer’s spouse.
A personal guaranty means that the buyer will stand behind your seller note with all personal assets. A spousal guaranty protects you on property that might be in the spouse’s name, or transferred later to the buyer’s spouse.
In the event that the spouse won’t sign, ask the buyer to provide a complete financial statement that details all personal assets. Then, insist on a guaranty against additional pledges or transfers of those assets during the seller note term.
Ask For A Stock Pledge
If the buyer is forming a corporation, ask that 100% of the stock in this new corporation be placed in trust to be voted by you if the buyer defaults on either the bank note or your seller note.
This right to vote the stock in case of default gives you a way to re-enter the business if speed is needed. By voting the stock, you can fire the buyer, hire a manager or even put the business back on the market for sale.
This right is especially important if you are in second position behind a bank. Banks usually have no interest in anything but tangible assets. When a business fails, a bank’s interest is usually best served by locking the doors so it can liquidate its collateral and move on!
Even in a case of a failing business, you can often get a manager on the scene in time to straighten things out before the serious damages caused by a bank foreclosure or a bankruptcy filing can take place.
A stock pledge is also a very clear message to a buyer that meeting the payment schedule is critically important.
Write Default Provisions
If the buyer is borrowing from a bank or signing a new lease with a landlord for the business premises, you need to get your lawyer to write cross collateral and cross default provisions into all agreements.
A cross collateral and cross default provision is merely an agreement between you and the bank and/or the landlord. It provides recognition for your position as a financing seller who wants to get paid.
Usually, such an agreement provides that a default in the bank loan or the lease is considered as a default on your seller note. This then gives you the power to do something under the provisions of your seller note. It also gives you the right to assume the bank loan and lease if needed.
Without this agreement, you may be powerless to save the business if things go wrong. Without it, either the bank or the landlord could lock the doors of the business without your knowledge or consent. This kind of agreement does not force you to act, but it gives you a helpful set of options.
Consider Insuring Buyer
If you finance your business sale, you then have an insurable interest in the life and well being of the new owner. In some cases, it makes sense to insure yourself against the potential death or disability of the buyer.
If your seller note is small or if the collateral is strong, then the expense of these policies is probably not justified. But, if the buyer’s management skills are essential to you getting paid, and your seller note is very large, consider it.
As in all insurance decisions, if you choose not to buy insurance, just remember that you are then the one who is assuming the risk of loss.
Look for a Co-Guarantor or Pledge of Additional Assets
In cases when a buyer is not financially qualified enough, look for a possible co-guarantor or pledge of additional assets.
Sometimes a buyer’s relative or friend is in a position to help. Occasionally the buyer will have other assets that can be pledged as collateral.
For the most part, co-guarantors are only a possibility in cases where the buyer is young or has a highly specialized set of talents. Young people’s parents are the most common source; a close second is a mentor or friend who recognizes a buyer’s extraordinary talent.
Often, buyers are very reluctant to pledge additional assets unless this is taken by the seller in place of the normal requirement for a personal guaranty.
Consider all seven ways to secure seller financing. Using them will greatly improve your odds of getting completely paid when you sell your business.
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The cyclical nature of the economy can add uncertainty to the timing of an acquisition, or an exit from a business. However, unlike the clarity of an improving economy or the risks inherent in a downturn, buying or selling at a market high creates a unique set of challenges.