While acquisition activity has made a definite about-face over the past several months – going from a quiet couple of years to headline deals nearly every week – reports indicate that bank or third-party financing hasn't necessarily kept up with the trend, especially for middle-market companies. Enter seller financing.
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Terry Mackin, managing director of Generational Equity LLC, a business brokerage in Dallas, TX, told the Wall Street Journal that as many as 90 percent of transactions that went through his company in 2011 included seller financing.
A willingness to help finance the sale of your company may help the sale move forward, but at the same time it will introduce you and/or your company to a lot of risk if things go south again. Here are a few things you can do to help protect yourself (from WSJ Online):
- Know the buyer: You're acting as a bank, so you'd better be treating this relationship as a bank would. Run a credit check, ask for references and analyze the finances of the buyer.
- Base payment on revenue, not profit: Eliminate the possibility of the buyer arguing about pressure on margins as a reason for not making a payment
- Hire a lawyer: Just as this is a bank transaction, it's a legal transaction that requires specific knowledge. You don't have to be the expert, but make sure you have one on hand.
WSJ's Emily Maltby includes other tips in her column, but the underlying message is, if you really want to sell – whether for retirement or just because you're ready to move on – this may provide you with more options when you do so. Risk will always be a part of the deal, but if you take appropriate steps, you can minimize that risk.