How to Get Paid in Full When You Sell a Business
Getting a good price for your business doesn’t do much good unless you get paid for it. Most sellers recognize this and want to get paid in full at the closing. In most of our sales, they do. Doing so isn’t a matter of just demanding that the buyer pay the full price of the business at the closing. There are things that you need to do and we do to get the selling price paid in full at the closing.
Few buyers that have the cash to pay you in full for the selling price of the business will want to do so. Most buyers understand that by borrowing part of the purchase price, they can increase the return they receive on their investment. If they have enough money to pay cash for your business, it is likely that, rather than do that, they will look for a larger business to buy. They will want to borrow part of the purchase price from you or a lender.
In order to borrow from a lender, a buyer needs to have a good credit score, the down payment, and enough business expertise to convince the lender that they will be successful operating your business. A lender will also need to see that your business generates enough cash flow to pay back the loan, generate an income to the buyer, and have a margin of safety left over. The lender will look at your tax returns to decide whether the business does generate this amount of money.
In addition to looking at how much you are paid and the earnings of the business, lenders will look at other add-backs such as discretionary benefits that you take out of the business, interest on loans being paid off, or one-time expenses that the buyer won’t have. We work with our sellers to calculate and show buyers and lenders what the cash flow of the business is.
The lender will use the information from the tax returns, not your internal statements or what you say the business makes. If your tax returns haven’t included all of the income of the business and, as a result, the tax returns show little or no cash flow, it is likely to prevent a buyer from getting a loan from a lender. Not showing all of your income on your tax return will make it harder to sell the business and make it much more likely that you will need to finance the sale.
Most of our sales are financed by SBA lenders or local banks that will give non-SBA loans to a business buyer. We know many lenders, that we refer buyers to, who look for the cash flow of the business to be adequate and who do not require collateral to back the loan. These loans can be approved quickly without too much paperwork.