We have talked about all types of Financing to help get a Business Started. I want to talk about one of the very typical methods for buying an existing Business. This is Seller Financing. Essentially, the Seller of the Business holds a note for some or all of the value of the Business. This style of Financing is very typical for Owner/Operator type Businesses. These can be anything from a Sole Proprietor to relatively small Businesses. The purchasers of these Businesses tend to have modest resources and can have difficulty obtaining an SBA Loan. There is an additional type of benefit for the Seller in that they receive their money over time. This can have significant tax benefits.
There is a downside to this type of Financing. There is risk that the new Owners may not be successful and may not be able to pay off the Business Loan. This can put the Seller at Risk. Even if they take over the Business, they may be unable to restore the viability of the Business. On top of that, this type of transaction is most often done at the time of Retirement and the Owner may have the desire to re-enter the Business from the Outside.
To compensate for this, Owners often stay as part of the Business for at least a transition period. Some of them spend some extensive time in the Business in a lower level or part-time role. In order to Balance the risk, a Seller might consider an Earn-out. This is essentially balancing the downside with an upside. The upside being that if the company outperforms an agreed Business Plan that the Seller receives additional compensation. This provides a balance between Risk and Reward. If the Seller is still part of the business, then this reduces the Risk even more.
Finally, it is critical that the new Owner (aka the Buyer) have a good Business Plan that they execute properly. This may require some significant growth of someone that is a Former Employee or comes without previous Ownership experience. Business Coach can mitigate this risk.
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