Buyers are generally categorized as belonging to one of the following groups although, in reality, most buyers fit into more than one.
The Individual Buyer
This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation.
The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time.
The Strategic Buyer
This buyer is almost always a company with a specific goal in mind — entry into new markets, increasing market share, gaining new technology, or eliminating some element of competition.
The Synergistic Buyer
The synergistic category of buyer, like the strategic type, is usually a company. Synergy means that the joining of the two companies will produce more, or be worth more, than just the sum of their parts.
The Industry Buyer
Sometimes known as “the buyer of last resort,” this type is often a competitor or a highly similar operation. This buyer already knows the industry well, and therefore does not want to pay for the expertise and knowledge of the seller.
The Financial Buyer
Most in evidence of all the buyer types, financial buyers are influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible.
Almost all the purchasers of the smaller businesses fall into the individual buyer category. But most buyers, as mentioned above actually fit into more than just one category.
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- Don’t have a valid reason for selling.
- Are testing the waters to check the market and the price. (They are similar to the buyer who is “just shopping.”)
- Are completely unrealistic about the price and the market for their business.
- Are not honest about their business or their situation. The reason they want to sell is that the business is not viable, it has environmental problems or some other serious issues that the seller has not revealed, or new competition is entering the market.
- Don’t disclose that there is more than one owner and they are not all in agreement.
- Have not checked with their outside advisors about possible financial, tax or legal implications of selling their business.
- Are unprepared to accept seller financing or now unwilling to accept it.
- Don’t have a valid reason to buy a business, or the reason is not strong enough to overcome the fear.
- Have unrealistic expectations regarding price, the business buying process, and/or small business in general.
- Aren’t willing (many of them) to do the work necessary to own and operate a small business.
- Are influenced by a spouse (or someone else) who is opposed to the purchase of a business.
Seller financing has always been a mainstay of business brokerage. Buyers don’t have the capital necessary to pay cash, are unable to borrow the money, or are reluctant to use all of their capital. Buyers also feel that a business should pay for itself and are wary of a seller who wants all cash or who wants the carry-back note secured by additional collateral. What sellers seem to be saying, at least as perceived by the buyer, is that they don’t have a lot of confidence in the business or in the buyer or perhaps both. However, if you look at statistics, it’s apparent that sellers usually receive a much higher purchase price if they accept terms.
Studies reveal that, on average, a seller who sells for all cash receives only about 80 percent of the asking price. Sellers who are willing to accept terms receive, on average, 86 percent of the asking price. The seller who asks for all cash receives, on average, a purchase price of 36 percent of annual sales while the seller who will accept terms receives, on average, 42 percent of annual sales. These are compelling reasons for a seller to accept terms. Business brokers have long been aware that reasonable terms are necessary if sellers are serious about selling their businesses.
The primary reason sellers are reluctant to offer terms is their fear that the buyer will be unsuccessful. If he or she should stop making payments, the seller will be forced to take back the business, hope that the buyer can resell the business, or forfeit the balance of the note. Another reason is that sellers feel that they can do more with cash than with the receipt of monthly payments. How often do sellers say that they need cash so they can buy another business? That is probably not the real reason, but selling their business (or house) may be the only time that they can get a “chunk of cash.” A business broker can help alleviate these fears by pointing out some of the ways sellers can protect their investment and by explaining some of the advantages of carrying the balance of the purchase price. Equally important is how the deal itself is structured.
Let’s first take a look at the advantages to the seller of financing the sale:
- The chances of the business actually selling are much greater with seller financing.
- The seller will achieve a much higher price for the business with seller financing.
- Most sellers are unaware of how much the interest can increase their actual selling price. For example, a seller carry-back note at 8 percent carried over nine years will actually double the amount carried. $100,000 at 8 percent over a nine year period results in the seller receiving $200,000.
- With interest rates currently low [at this writing], sellers can get a much higher rate from a buyer than they can get from any financial institution.
- Sellers may also discover that, in many cases, the tax consequences of accepting terms are a lot more advantageous than those on an all-cash sale.
- Financing the sale tells the buyer that the seller has enough confidence that the business will, or can, pay for itself.
- The seller may be able to borrow some cash using the note and security agreement as collateral. It may not be as easy as borrowing against real estate notes, but it’s still better than nothing.