In this series of articles, we are going over the top mistakes business owners make when they decide to sell their business.
When it comes to selling your business, knowing what works and what does not is crucial. Ineffective selling strategies and unrealistic expectations can stop your business from landing a quality new owner and delay — or even eliminate entirely — your possibilities to exit your business. Being conscious of some of the mistakes that plague the exit strategies of many business owners, and on top of that, taking action to avoid these mistakes, can help you better prepare yourself and your business for the eventuality of a sale.
Deadly Mistake: Cash Only!
The tenth mistake is to only entertain all-cash offers for the business. Most business owners refuse to accept any offer unless the buyer is willing to pay 100% cash on the closing of the deal. On the surface this demand seems perfectly reasonable. However, upon further inspection you may agree that it is downright unrealistic and extremely hurtful to the chances of finding a buyer for your business. If your main goal is to sell your business, you may have to let go of the notion of an all-cash sale!
It is rather naïve to hope for all-cash sales in today’s business-for-sale marketplace. Times are tough and it is often hard for the buyers to have all of the capital necessary to purchase a business. When thinking about selling your business, it is important to try to look at things from the buyer’s point of view. Banks and other lending institutions might be unwilling to lend money when the opportunity to buy a business arises. The tough lending criteria and qualification requirements leave many buyers seeking other creative financing options to finance their purchase deal.
Instead of handing over a big chunk of cash at closing, buyers today are more likely to seek multiple forms of financing in order to fund the purchase of a business. You will have a better chance of selling your business and of attracting qualified buyers if you help the buyer with financing options. Close to 90% of all sales of small businesses across the US involve seller financing to some extent. The ratio for medium-sized businesses is around 50%.
It’s no secret: motivated buyers are highly attracted to sellers offering some form of owner financing. The business owner or seller is likely to have more lenient criteria for forwarding the loan than the financial institutions, so the loan is easier to obtain. The buyer may hope to get a more suitable interest rate and pay back structure. By offering seller financing, the seller is demonstrating his confidence in the business’s ability to help the buyer pay back the loan. The usual five- to seven-year financing deal ensures the seller will be somewhat involved in the business and will be there to consult or advise the new owner when needed.
As a seller, you can enjoy the proceeds from the sale over several years, and in the process you may end up paying less in taxes over a period of years, rather than having to pay taxes on the entire amount at once. If you qualify for an installment sale treatment, you are likely to secure a tax break. If you market your business with owner financing as an added value-enhancer, you are sure to get a better valuation in the market and a higher price for your business. A well-structured deal powered by seller financing is likely to earn you much greater financial rewards than an all-cash offer. The additional interest received on the seller carry-back makes the deal an even more enticing prospect.
There are many ways you can offer financing to a buyer. The most popular way is to allow a buyer to make a down payment. The seller then takes a note for the rest of the purchase price. The business itself is the primary collateral for the deal. The payment schedule, interest rates and loan periods can easily be negotiated between the two parties. Whether you are financing the entire deal or a part of it, you need to be aware of the associated risks. You are essentially counting on the buyer’s ability to make a profit by running your business. Choosing an experienced buyer becomes even more crucial when you are financing the deal yourself.
How Insisting In All Cash Offers Scares Away Buyers
Money is not the only thing that matters in this arrangement. Finding a suitable new owner who can take your business to the heights you envisioned should also count. Many business owners who insist on an all cash offer fail to sell their business altogether, let alone get the right buyer for their business. It is important to understand the economic and financial environment at the time of selling a business and be willing to make necessary adjustments to your plans and expectations. If you offer to help the buyers achieve the financing necessary to purchase your company, in turn you will gain access to a greater pool of buyers, and will be able to choose one that has the knowledge and passion to lead your company.
Most buyers envision selling their business within a few months of placing their business on the market. This is highly unlikely in the first place. You need a good couple of years to prepare your business, identify the qualified buyers, and negotiate a good deal with a buyer. Demanding an all cash offer can further elongate the process, as finding the right buyers and convincing them to pay the full amount in cash can be highly challenging. An all cash deal may make obvious sense when you start thinking about selling your business; however, as you gain practical market experience in any given economic climate, you cannot help but think otherwise.
In the current economic environment, an all-cash offer is not likely to get you the buyer and the deal you are looking for. You will find it all the more challenging to find a good buyer for your business, and this in turn will most result in you getting a lower price for your company, while the tax burden will make it a financially inferior deal in the long run. A qualified team of experts can guide you towards balancing the highest value and the fastest closing times on one end, and on the other the most flexible and attractive terms to catch a qualified buyer’s attention.