Chance-OpportunityThere is a strong misconception that if you’ve sold your business, you’ll never have to deal with any financial hassles again. However, selling to business owners who end up foreclosing or missing payments can leave you with a failing, poorly run business you need to take back to save. To prevent any future hassles, you’ll want to make an effort to receive all cash at closing.

Why You Need Cash at Closing – Missed Payments & Foreclosure

You did a great job of managing your South Florida business, but the new owner may not have your same skill set and temperament to successfully run the business. This could cause sales to drop for the new owner and make it challenging for them to meet loan payments. If the loan for the business was seller-financed, this could be problematic.

In the case that you are forced to foreclose and take the business back, it most-likely will not be in the pristine condition it was in when it was sold. This will result in the business having less value and forcing you back into business, which is not what you want to do after having sold your business.

Closing Your South Florida Business Sale with an SBA Loan

It can be tempting for you to to take seller financing. The buyer could be thinking of the opportunity to earn a high return on their money with a promissory note and a mortgage on the business.

However, when approaching retirement, being conservative and safe is what most financial advisers suggest. Sometimes it is required, due to circumstances, and then the buyer has to make a business decision about whether to move forward. One great alternative to the seller-financed payment method is to go for an SBA loan and an all-cash deal.

To insure a business will qualify for an SBA loan, so the seller gets all cash at closing, consider the following:

  • Almost every SBA-guaranteed loan is for a 10-year amortization at a 2.75% interest rate, over the WSJ prime rate, adjusted quarterly, which will make it easier for the new owner, from a cash-flow perspective. Most sellers would not want to amortize their loans for 10 years.
  • After a 25% cash injection (down payment), the business must be able to pay the debt service and a salary that pays at least the buyer’s personal overhead plus 25%. The lender will look closely at this requirement and validate its accuracy. The bank wants to be sure there is enough profit for it to get paid. The price of the business is what drives the amount of debt service. This means the business has to be priced realistically, which an experienced intermediary will help establish
  • It is advisable to use an SBA loan broker to package and place the loan with a “preferred” SBA lender. Trying to deal directly with a local bank can be a very frustrating expense that rarely produces the desired results. A quality South Florida business broker will know who is lending, what their requirements are, and how the lender will want the package presented. Such a loan broker will package the business on a timely basis.
  • When dealing with an experienced intermediary/business broker, these factors are taken into account as the suggested asking price range is established and the loan placed with a loan broker. At Dolan Sales, Inc., we have been working with the same loan broker for more than 15 years, and have never been let down. Even during the recent financial meltdown, this loan broker was able to get loans funded for our clients.
  • In the sales process, your experienced intermediary or business broker can qualify the buyer knowing these facts, to ensure the potential buyer can get funded. This includes making sure the business can meet the debt service and pay the new owner a salary from the business, plus 25%. This is called the debt coverage ratio, which has to be a profit factor of 1.25 of the annual debt service. The proposed new owner (borrower) also must be willing to allow the bank to use their home as additional collateral and must have a stellar credit history; they can obtain life insurance in the amount of the loan. All of this should be determined early in the sales process, to avoid wasted time later in the process.

Following this strategy, closing a sale with all cash is not difficult or impossible. Making this effort will result in a successful sale of your South Florida business, with out the worry of dealing with post-sale issues. If you are looking for an experienced South Florida business broker to assist you in you in the success of your sale process, contact Dolan Sales.