One common fear among business sellers considering seller financing when selling a business is the possibility, no matter how slight, that the buyer will default on the seller’s note and they will have to repossess the business and go through the entire sale process again.
It’s a fair enough concern. After all, if you DID want to take the business back why would you be selling it in the first place, right? This isn’t some big box department store with a returns department where if you’re unhappy after selling your business, you get to take it back a few weeks later and get a full refund. This is real life, and in real life selling and buying businesses is a big, BIG decision. But let me help you make the right one by controlling the risk of this big decision.
Why is it that the thought of possible repossession of your business after a sale give you such heartburn anyway? Is it possible that you are burned out? What caused you to get into the business in the first place (however many years ago) is not where you are at today. You are selling your business for a reason. No one can blame you for not wanting to start all over again, coming out of retirement or whatever new venture you are on, and going back to the office, or the factory, or whatever. Don’t let burnout you are likely feeling (possibly the reason you are selling your business in the first place) lead you to make bad decisions about your financial future.
Certain businesses are hard to run, and you don’t want to take it back for a variety of reasons. But what are they? Before you accept this reason – “I don’t want to take it back” – as why you don’t want to get involved with seller financing, I want you to at least consider “why” you don’t want to take it back.
No, really.
Ask yourself, “Why don’t I want to take the business back?”
More specifically, ask yourself:
- Are you burned out?
- Do you want to try something else?
- Are you fed up?
- Are you afraid that you have hit the summit of what the business is able to do?
I asked this particular series of questions because when I sold my business, I turned to my business partner and said, “I hope he pays us for three years and then we have to foreclose. Even if he runs it into the ground, that’s fine.”
Why would I ever say such a thing? Because seriously, it didn’t bother me if he did run the business into the ground because I knew I had the monitoring and covenants in place to be able to step in before it was too late.
In fact, I saw this “three years and foreclosure” deal as a best-case scenario. I didn’t hat my business, I didn’t think it had tapped out of potential growth. I just wanted a different Venture. Think about it. If the buyer paid me three years of principal and interest, it meant I could take it a little bit easy while I retooled for my next business venture. If I then had to foreclose or exercise my rights with the “stock pledge,” and the buyer has signed a personal guarantee, the buyer would still owe me the money, but I would own the company again. I knew I would be able to step back in and take the company back to where it was before even if the buyer made a mess of things. Yes, this might be hard, but it’s well worth it. Why? Simple. I would sell it again.
Repossess, remodel, and resell is a proven business model in real estate, and also in other areas of business.
My grandfather taught me this about real estate: when you foreclose on a property, you take a portion of the money that they paid you and remodel the house. Then sell again. My grandfather did this repeatedly. Why? Because it worked. In fact, he made a lot of money with this business model.
No, I didn’t get the opportunity to foreclose on my high-end janitorial company, but if I had, I would have seen this as a win/win, not as a win/lose – as an opportunity to make more money, and not the other way around.
If your company is really ready to sell, then your company is not fragile. Meaning, an experienced and qualified buyer is very unlikely to “run” the business into the ground to the point that you have to take the business back.
I truly believe that most business owners could look at their business objectively and see that they could step back into the business (if monitored properly) and get the business back to the level of selling it quickly.
If you are still uneasy with this prospect, minimize the time of financing with bridge financing, lessening the period of time when things could go wrong. If you don’t want to have your money “tied up” for a long period of time and you certainly don’t want the business back, consider financing the business for a short period of time instead.
Consider a 24-month loan with a balloon payment at the end, called a bridge loan. This will limit the time of your “risk” of taking the business back over. This may be necessary to cover a short-term lending problem that the buyer may have in buying the business. This bridge loan will help “bridge” the gap for the buyer, the gap between the sales price you want and any bank limits on the amount that they can loan for the sale of a business. Its easier for the buyer to get the money to consolidate debt 24 to 36 months after closing.
Another option is to limit the amount of time that you carry the loan by “selling the note” to a note broker.
The fear of possibly having to take back your business in a seller financing default situation is, when carefully analyzed, not much of a reason at all. Safeguards exist in the seller-financing model that protect you from losing your investment in your own company.
Even if someone did step into your shoes, not fill them properly, run the company into the ground and have to turn it back over to you, what’s the loss? Okay, so you play golf a few less days a week until you build the company back up and sell it again. It really IS win/win, even if it’s just a tad more work.
