How to Buy a Business through Seller Financing
by Arina Smith Finance 17 September 2018
In many cases, you may fall short of the seller’s asking price, yet you want to purchase their business. You may also lack enough physical assets to act as collateral to get a bank loan. At times like these, seller financing may be your only refuge. So what exactly is seller financing? It is financing a business directly through the person selling it and mostly happens when you don’t have the purchasing price onhand. It is useful as it enables people with limited funding to become business owners. Are you looking to buy a business? Here are some insights into buying the business through seller financing.
When it’s necessary:
Lack of enough capital to meet the owner’s asking price is not the only reason for seller financing. In some instances, you may have the money but then feel like they are asking a little bit too much. It could be due to your valuation of the business or the risk involved in general. In such cases, seller financing would be crucial and could help both parties to get what they want.
Request financial records:
Sometimes the owner of a business will try as much as possible to market it and try to grill you down to pay a little over the appropriate amount. To avoid getting swindled by this, do not just take whatever the owner tells you at face value. Ask for bank statements, profit and loss accounts, inventory list, cash flow analysis, and any other necessary documents. Go through each one of them and make sure they make sense before making any decision. Trusting a seller is a mistake you might come to regret. Attend to each issue systematically and make sure you have an attorney by your side before spending millions.
Consider other financing options:
It’s not advisable to get all the financing from the seller, as it could to some level of vulnerability. If possible try to get a bank loan to cater for the purchase. If anything, most sellers only offer to finance at a certain percentage unless they are doing you a favor or you know each other outside of the business transaction. So, for financing, keep your options open to avoid inconveniences.
When getting a business, there will always be something adjustable, whether it’s the purchase amount or the period to pay in full. The asking price, for example, is a good one to negotiate by getting creative on the terms. It could be helpful in avoiding getting exploited by the owner. Sometimes you can make an earn-out agreement where the buyer decides to pay the seller more when the business is doing well, and profits exceed your expectation. Negotiations are supposed to make the deal favorable to the buyer.
Discuss the involvement of the seller:
For many business owners the process to sell their business is not always easy, and before they can do so, they need a guarantee that it is in good hands. The owner may decide to stick around as a consultant and offer essential advice. It’s always good to check out how the owner wants to be involved in the business. The owners also help in devising a solid business plan that can run the company for a while. This can be especially helpful when you are trying to run a business in a local market. For example, if you are looking at Miami businesses for sale in the antique industry, the previous owner may be able to provide you the guidance necessary to grow the business beyond what they were capable of.
Go through the sales agreement:
After all the details having been sorted out, then the owner’s lawyer is supposed to hand you all the information concerning the sale. This agreement includes all the assets you are buying, terms and conditions, inventory and other important details. Go through all the details and see if everything checks out before finalizing the deal to avoid getting duped. The sales agreement is the primary basis in case of a court suit when things don’t go too well.
Buying any business is a very complicated process. There are too many details to adhere to, and one mistake could cost you millions. It is a long process, yes, and you might give up along the way. However, nothing comes easy. Take as much time as possible to iron out all the requirements without hurry to avoid making mistakes or forgetting crucial details to the contract. Follow these tips and they will prove helpful in acquiring a business through seller financing. Good luck!