A Deeper Look At Seller Financing When Exiting Your Business

Buying a business requires a good deal of capital or lender resources.  The bottom line is that a large percentage of buyers don’t have the necessary capital or lender resources to pay cash and that is where seller financing comes into play.  The fact is that seller financing is quite common.  In this article, we will take a deeper look at some of the key points to remember.

Is Seller Financing a Good Idea?

Many buyers feel that a seller’s reluctance to provide seller financing is a “red flag.”  The notion is that if a business is truly as good as the seller claims it to be, then providing financing shouldn’t be a “scary” proposition.  The truth is that this notion does carry some weight in reality.  The primary reason that many sellers are reluctant to provide seller financing is that they are concerned that the buyer will be unsuccessful.  This, of course, means that if the buyer fails to make payments, that the seller could be forced to take the business back or even forfeit the balance of the note.

However, it is important for sellers to look at the facts.  Sellers who sell for all cash receive approximately 70% of the asking price; however, sellers receive approximately 86% of the asking price when they offer terms!

Seller Financing has a Range of Benefits

Here are a few of the most important benefits associated with seller financing: the seller receives a considerably higher price, sellers can get a much higher interest rate from a buyer than they can receive from a financial institution, the interest on a seller-financed deal will add significantly to the actual selling price, there are tax benefits to seller financing versus an all-cash sale and, finally, financing the sale serves as a vote of confidence in the buyer.

Clearly, there are no guarantees that the buyer will be successful in operating the business.  Yet, it is key that sellers remember that in most situations the buyers are putting a large percentage of their personal wealth into the purchase of the business.  In other words, in most situations, the buyer is heavily invested even if financing is involved.

Business brokers excel in helping buyers and sellers discover creative ways to finance the sale of a business.  Your broker can recommend a range of payment options and plans that can, in the end, often make the difference between a successful sale and failure.

BizBuySell Reports Q1 2017 Small Business Transactions Up 29 Percent, Financials Reach Record Levels

BizBuySell just released the results for business sales in Q1 of 2017.  Per the article – “Though the spike in small business transactions may be partly due to a rush of buyers and sellers looking to close deals around the New Year, a healthy economy, strong small business financials, and access to financing are also enticing more buyers and sellers to the market.”

Below are a few highlights:

1. Businesses sold in Q1 grossed a median revenue of $518,159, an 8.4 percent increase from $478,000 in the first quarter of 2016.
2. Median cash flow also increased, up 6.6 percent year-over-year to $117,275 from $110,000. These key financial indicators are the highest totals since BizBuySell first started tracking data in 2007.
3. The average multiple of cash flow, which remained flat over the past few quarters, increased 1.6 percent from 2.31 to 2.35.
4. The median sale price increased nearly eight percent
5. Over the past few quarters, the number of small businesses listed for sale has steadily increased. That trend carried over into 2017 as total listings increased 3.8 percent from last year.
6. Baby Boomers looking to capitalize on today’s favorable conditions and exit small business ownership for retirement are fueling the market supply.
7. Looking into specific industries, the restaurant and retail sectors experienced the greatest growth. The number of closed transactions in the restaurant sector increased 29 percent year-over-year.
8. Retail business transactions increased 28 percent, just shy of the growth recorded in the restaurant sector.

Northern California Business Sales Stats Q1 2017

Source: BizBuySell

How Subscriptions Can Increase The Value Of Your Business

3 Surprising Reasons To Offer A Subscription 

You can now buy a subscription for everything from dog treats to razor blades. Music subscription services are booming as our appetite to buy tracks is replaced by our willingness to rent access to them. Starbucks now even offers coffee on subscription.

Why are so many companies leveraging the subscription business model? The obvious reason is that recurring revenue boosts your company’s value, but there are some hidden benefits to augmenting your business with a subscription offering.

Free Market Research

Finding out what your customers want is expensive. By the time you pay attendees, rent a room with a one-way mirror and buy the little sandwiches with the crusts cut off, a focus group can cost you upwards of $6,000. A statistically significant piece of quantitative research, done by a reputable polling company, might approach six figures.

With a subscription company, you get instant market research for free. Netflix knows which shows to produce based on the viewing behaviour of its subscribers. No need to ask viewers what they like, Netflix can see what they watch and rate.

For you, a subscription offering can allow you to test new ideas and gives you a direct relationship with your customers so you can see what they like first hand.

Cash Flow

Subscription companies are often criticized for being hungry for cash. Many charge by the month and then have to wait months—sometimes years—to recover the costs of winning a subscriber.

That assumes, however, that you’re charging for your subscription by the month. If you’re selling your subscription to businesses, you may get away with charging for a year’s worth of your subscription up front. That’s what the analyst firm Gartner does, and it means they get an entire year’s worth of cash from their subscriber on day one. Costco charges its annual membership up front, which means it has billions of dollars of subscription revenue to float its retail operations.

Loyalty

Customers can be promiscuous. You may have a perfectly satisfied customer but if they see an offer from one of your competitors, they might jump ship to save a few bucks. However, if you lock your customers into a subscription, they may be less tempted to try a competitor since they have already made an investment with you.

One of the reasons Amazon Prime is so profitable is that Prime subscribers buy more and are stickier than non-Prime subscribers. Prime subscribers want to get their money’s worth, so they buy a wider swath of products from Amazon and are less tempted by competitive offers.

The obvious reason to launch a subscription offering of your own is that the predictable recurring revenue will boost the value of your company. And while that’s certainly true, the hidden benefits may even be more important.

Four Potential Issues When Selling Your Business

Outlined below are a few unexpected aspects of the business exit process that can pop up and often create issues.  Sometimes they severely impact the turnaround time of a sale.

If you can understand these potential issues better, you will be better prepared to try to circumvent them.

1.  Do You Have Time on Your Side?

It’s helpful to use an intermediary who will assist with the filtering of prospects vs. “suspects.”  However, the inclusion of yet another party, in addition to both the business seller and potential buyers, increases the amount of time required to navigate the process.

Sellers are typically unaware of the time and documentation needed to compile the required Offering Memorandum.  Once completed, the seller must provide both the intermediary and potential buyer more time to review and propose meetings and pricing.  In the interim, owners are faced with the challenge of keeping their business thriving.

2.  Trying to Do Too Much

It’s not surprising when a company owner is also its founder that individual is typically used to making all of the decisions.  That’s why business owners in the midst of selling will soon find themselves challenged with the desire to fully be a part of both the selling process and the running of the business.

Delegation to someone else, such as the Sales Manager, can be truly invaluable.  Think of your top people as extremely valuable resources.  They may have first-hand knowledge regarding additional concerns such as competition and potentially interested acquirers.  Bringing in trusted employees to be part of the sales process can be tremendously beneficial.  But many important items should be considered “before” speaking to any employees about your exit.  In some cases, it may be best to hold off telling employees until after the sale.

3.  Delays Due to Stockholders

When mid-sized, privately held companies are supported by minority stockholders, these individuals must be included in the selling process—however small their share may be.  The business owner will need to firstly obtain their approval to sell by using the sale price and terms as influencers.  Of course, issues such as competing interests, pricing disagreements, and even inter-family concerns may cause conflict and further delay the process.

4.  Money Issues

Once sellers decide upon a price that they would like to see, it is sometimes difficult for them to accept or even consider anything less.  After all, a business owner likely created the company and may have a strong emotional attachment.

Another factor that often interferes with a successful sale occurs when sellers instantly turn down offers because they don’t meet with their desired asking price.  There’s a say in the business sales industry- “You can’t separate the “price from the terms.”

That’s when the intermediary can often come in to salvage the deal.  A business broker often serves as a negotiator.  He or she can work out a deal that is structured in a manner that works for both sides.

Copyright: Business Brokerage Press, Inc.