Importance of Financing in Selling Your Business
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The Importance of Financing in Selling Your Business
When a business owner is considering selling his or her business, too often s/he gives too little thought to how the buyer is going to pay for the purchase; this is often thought of as the buyer’s problem. In reality, of course, it is the seller’s problem if s/he wants to have a consummated transaction.
As a prospective seller, you should be aware of what financial institutions look for in making a business purchase loan decision. Beyond good credit on the part of the buyer and an adequate down payment, the lender is going to require the following:
- Industry experience on the part of the buyer. Has the buyer managed, or at least worked in, the industry that the business that s/he wants to purchase is part of?
- Provable cash flow on the part of the business. The cash flow has to be adequate to support the debt service i.e. payment of principal and interest plus some cushion in the event that business falls off.
- Can the buyer make a living? In addition to cash flow being adequate to support the debt service, plus a cushion, there should be adequate cash flow to provide the buyer with a salary at least equal to what s/he would earn in the same industry as an employee.
- Will the seller provide some financing? While not a requirement, it does give a financial institution some additional comfort in that it shows that the seller has confidence in the continuity of the business, as well as confidence in the prospective buyer’s ability to manage it successfully.
Insofar as seller financing is concerned, if there is a financial institution providing financing along with the seller, the seller’s legal position will almost always be subordinate to the bank. If you would like a cost-free consultation regarding financing the sale of your business please call Brad Palmer, C.P.A. at Crown Business Brokers, LLC. (908) 931-9300.
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