So, you want to sell and you acknowledge that most folks don't have a lot of cash right now and if they do they are reluctant to part with it. You, the seller may have no choice but to be the bank.
And if you do seller finance the sale of your business the sale of your restaurant or bar what are the top ten things you should take into consideration.
1. USE A PROFESSIONAL TO ASSIST YOU: The basic message here is to engage a really good business broker, escrow company or note buyer service to help draft the note and a lawyer to be sure that the financing documents say what you want them to say and protect you the way you want to or need to be protected.
2. DO A THOROUGH BACKGROUND CHECK ON THE BUYER: Insist on resumes, references, credit reports, personal and business financials statements to prove staying power. Do a background search for public records. Get a business plan or business outline prior to close of escrow so that you know where the buyer is going to take your business. Act like the SBA and turn them down if they do not have experience in the type of business you are selling. How about getting a resume with references that you can check?
3. MAKE SURE YOUR BUSINESS CURRENTLY GENERATES ENOUGH CASH FLOW FOR THE BUYER TO PAY THE DEBT SERVICE AND TO PAY A LIVING WAGE: Nothing unusual here. This is just what the SBA does to make sure they have a reasonable probability to get repaid. You should too. This might be hard to do, if your business is not making money or you are really just selling the assets without any financial representations.
4. GET A NOTE BUYER INVOLVED UP FRONT IF YOU THINK YOU MIGHT WANT TO SELL THE NOTE IN THE FUTURE: It is not uncommon for the note holder to want to sell the note in the future. It will be discounted for sure and more than you might like if not properly constructed in the first place. Input from a note buyer might just be the trick to get you on more secure ground for a sale of the note in the future.
5. MAKE SURE THE TERM OF THE NOTE IS NOT LONGER THAN THE LEASE: If you are selling a business that operates from leased premises you need to keep the term of the note and all payments within the duration of the term of the lease. This is very important to assure that there is cash from the business to pay the note. If the lease expires, that may be the end of the business and the end of your ability to collect any remaining balance or to re-enter the business in the event of default.
6. MAKE SURE YOU GET GUARANTEES: Guarantees are a promise to pay. You want personal guarantees and legal entity guarantees. Personal guarantees are a must if selling to a sole proprietor and if selling to a legal entity such as a corporation or LLC and you are selling a main street business you get guarantees from the legal entity and all of its members or stockholders. Get joint and several guarantees from the members or stockholders which means they are collectively responsible and individually responsible and get them from the current and future participants.
7. COLLATERAL FOR THE NOTE IS A MUST: Collateral is what secures the note. In a small business sale the collateral will generally be the business, the trade name and the assets of the business. If the value of the assets of the business does not reach the level of the note, you can also secure the note with collateral outside the business such as real or personal property belonging the the buyer.
8. MAKE THE PAYMENTS DOABLE FOR THE BUSINESS BY ADJUSTING THE AMORTIZATION LENGTH, IF NECESSARY: The payments on the note must be doable for the business. You can do this by adjusting the length of the amortization of the note without compromising your ability to get paid. Again, don't go beyond the length of the note for payments. This tactic most often leads to balloon payments throughout the payment period or at the end of the payment period. Balloons are sometimes good but you must realize that the balloon might put you at greater risk. Balloons are good in an environment where you let the buyer season the note and at a future date as the business grows you think you might be willing to renegotiate the loan and balloon terms.
9. IMPORTANT CLAUSES IN THE NOTE: I generally suggest a due on sale clause, a clause that permits or prohibits early payment, a clause or clauses outlining the buyer's ability or inability to remove or sell individual assets without your permission and an explanation as to what role any additional purchased assets will play in the loan collateralization, a clause that speaks to potential assignment of the note by the buyer, late payment stipulations, default procedures and process and late payment fees and interest.
10. INSURANCE ON THE COLLATERAL: If the assets of the business are the collateral, you will want to require specific amounts of coverage and you will want as the note holder to be a named party regarding payments on the collateral in the event that an insurance event is triggered.
11. LEASE CONSIDERATIONS: If you are selling a business that will be on a lease to which you have been a party, consider a cross default clause that you the buyer and the landlord will be a party to. Simply stated, a cross default clause means that if the buyer is in default on the lease it is also considered a default on the note and vice versa. And make sure that in the event of default that your right of re-entry is clearly spelled out in the cross default language or any lease assignment or sublet document.
Brian Harron is a licensed real estate broker specializing in the sale of restaurants, bars and liquor licenses in the State of Arizona. He is affiliated with Sunbelt Business Brokers, Prescott, Arizona and can be reached at 928-541-0890.
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