The need to use seller finance when trying to sell your privately held company has come back into vogue due to the lack of third party finance being readily available. Some techniques less known and used, however, are available but require a clear understanding between the seller and buyer and may then need good legal agreements to clarify, protect and define the responsibilities of each of the parties. Here are five options both a seller and buyer may want to consider.
Option One: Allow the buyer to assume the sellers credit. Both parties need to be clear on their roles and responsibilities, but if the buyer is able to run the business and continue to buy all inventory or other items the seller always bought and paid so they earn a high credit rating, this can make the transition of the business easier to the buyer. If this method of financing is considered, an agreement should include a separate indemnification clause between the seller and the buyer making the debt the ultimate responsibility of the buyer. Using a good attorney is best to prepare this legal document.
Option Two: A similar idea to the one above but of the buyer assuming the sellers credit, the buyer is allowed to assume capital notes and leases. The seller is allowing his good credit to again be exposed to future decisions of the buyer, but can help the buyer to build their credit worthiness.
Option Three: A popular approach where the seller of the business has conceived an idea or the business would experience strong growth by either a capital injection from a buyer or merging with a much strong business is an earn out. An earn out basically is an agreement that the seller will receive a portion of the sale price based on the sales or profit achievements of the business in the future. This can be attractive to both parties where it is clear the business will grow once the buyer and seller come together. Some buyers like to use an earn out as an incentive to the seller to make sure the business transitions cleanly to the buyer. This can be difficult to negotiate; especially if the seller has little to no control over the buyer and the operation of their business and its employees.
Option Four: If a business has a large amount of inventory that the seller owns outright, the use of a consignment sale for this part of the transaction may be useful. Under this scenario, the seller retains title to the inventory but allows the buyer to sell it in the business and pay the seller for the inventory as it gets sold. This saves the buyer having to get inventory from other businesses while it allows the seller to get his money from the inventory and be exposed to the market.
Option Five: A very common option when selling a business that also includes real estate owned by the seller is for the buyer to lease the real estate from the seller for a period of time and have the first right of refusal to buy the real estate if at some point the seller wishes to sell.
Seller finance does not have to be restricted to purely a seller note on the transaction. A seller can be used to receiving many business -perks’ they have enjoyed from owning and operating their business. Allowing the seller to continue enjoying those -perks’ can be a good strategy when buying a business.