How Do I Get Paid for My Business?
Few people save for tuition, down-payment for a home, retirement, or even a rainy day. Fewer still save up to purchase a business. How, then, will you get paid when you're ready to sell?
I Have a Promising Buyer; but, the Buyer Has No Money.
A tiny fraction of small business owners receive a lump sum payment when they sell their company. That’s because there are so few people wandering around our communities who have the ability to write a big check when an owner is ready to sell. Saving and investing is not a strong point of our country’s citizenry. Few people save in advance for their children’s tuition, a home-purchase down payment, a rainy day reserve, or even their own retirement. Fewer still are saving to purchase a business. So, how will you get paid when you’re ready to sell?
Perhaps your buyer will get a bank loan. Typically, banks could lend 75-90% of tangible asset value. Using $500,000 as an example sales price, comprised of $100,000 in tangible assets (inventory, furniture, fixtures, and equipment) at fair market value (liquidation proceeds at auction), and goodwill (blue sky) value of $400,000, a bank might lend about $80,000. That leaves you short $420,000. "Wait," you say, "what about the other assets your buyer could pledge as collateral?" For that, the banker will look at your buyer’s personal financial statement. They’ll consider home equity, other real-estate equity, and investments in stocks and bonds. Even if there were meaningful tangible personal assets, the bank still requires a strong credit score, an acceptable debt to income and debt service coverage ratio. The odds are not in your favor to receive a “big check.” "OK," you think. "I’ll finance the sale myself (“carry the paper”), and assume the role of the bank."
Financing a sale yourself is really easy. There’s no application, underwriting process or loan committee to deal with. You will prepare some contractual documentation, get signatures, your buyer will promise to make the payments, and you can relax into your new, reduced-stress life, after spending the past 20, 30, or 40 years managing a multitude of risks operating your business. But, can you relax knowing that for your life’s work, you’re owed $420,000? Maybe not. Unless banking had been your profession, I wouldn’t recommend becoming an amateur financier during retirement. There is another way. We call it an ownership accumulation plan.
Our ownership accumulation design can overcome most of the hurdles small business owners face when considering the sale of their business: Financing the sale, gaining confidence that the buyer has sufficient business experience, maturity, financial analytics comprehension, critical decision making skills, and more. This type of plan requires many years to execute; however, the magic of time is working for you, instead of against you, as you drift inexorably closer to your desired exit date.
With time on your side, you can allow your buyer (often already working for you) to acquire an affordable minority share in your company, definitively putting them on the ownership path, while you educate and train them to become your successor owner. A 5-10 year transition allows for additional share purchases, provides a known completion date, and allows both parties ample time to transition into, or out of, their roles with confidence. It is only when procrastination dominates good business sense that owners struggle to get paid for what they worked so very hard to build. Regardless of the age of the owner or buyer, there is always a place to start. We can help!
Check out our primer: https://perpetualbusiness.co/product/perpetual-business-basics.