Selling on Terms

It is an age old question whether to hold out for cash or to sell your business on terms. In many cases the answer would rather be a result of the owner’s personal circumstances and needs. For instance it would not be sensible to try and sell your business on terms if the net asset value is very small and there is a large amount of existing loans, bank overdrafts, higher purchase and lease agreements outstanding. Your banker will not release you from the surety ship for these loans.

On the other hand if most of your equipment has been paid for and there is not a huge loan amount outstanding you may consider selling your business on terms. There are however a few pointers that will assist in structuring the correct deal when selling your business on terms:

1. Buyer Commitment – A seller should make sure that the initial deposit is of such that the buyer shows genuine commitment to the transaction. At least 50 – 60% of the purchase price should be paid as a deposit.
2. Buyer Experience and Skill – It would not make sense to enter into a transaction of sale where you afford terms to a buyer that does not have the necessary skill or background in running the type of business you are selling.
3. Cash Flow – As the current owner of the business you are in the position to make the best judgement on whether or not the business can afford the repayments required by such a structured deal.
4. Buyer’s Personal Finance – Once you are sure that the business can afford the cash flow required you will also need to ask if the buyer can afford to live on the income from the business after payment to yourself. It is a huge risk to sell a business on terms if the buyer himself has got a lot of personal debt and liabilities.
5. Asking Price – Experience have shown that a seller that makes available terms in a structured deal does receive a better selling price.
6. Interest on Outstanding Loan – This can be negotiated with the buyer and the norm is that the seller can dictate a higher interest rate than the normal bank deposit.
7. Contract – This will be of the utmost importance and will set forth the terms and conditions of payment. Make sure there is a provision whereby you as the seller will be able to retake possession of your business in the event that the buyer fails to make due payment of installments.
8. Other Structures – There are many ways to structure a deal for the selling of a business. One can also look at the option of only selling a portion of ownership and retaining some sort of management/control over the activities of the business. Your broker will be most helpful in this regard.

Advantages of selling your business on terms:

1. You can be sure of a quick deal.
2. In most cases you will be able to get a better selling price.
3. You will have a more favorable return on the outstanding loan amount.
4. You will have the advantage of cash flow to yourself from the monthly installments from the buyer.
5. If structured correctly there is certain tax advantages.