Business Killer #4: There’s Plenty of Time for That

Business Killer #4: There’s Plenty of Time for That

by | Jul 16, 2013 | Advice

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So far, we’ve killed off two business owners and left another one with a disability. In the remaining Business Killers installments, the owners are alive and healthy – but they’re still capable of making potentially fatal mistakes.

An art gallery is owned and operated by an older man whose daughter works for him. The scene opens with the daughter mentioning that her friend Jeff just found out that the family business he had planned to take over had been sold. Although the intention was to keep it in the family, Jeff’s father had put all his money into the business and needed to sell to fund his retirement.

The daughter is concerned because her own father has reinvested most of the art gallery profits into the business. She’s worried that she could end up like Jeff and urges her father to develop a viable succession plan for the gallery. But he isn’t interested in taking the time to do so, and tells her not to worry. Besides, he says, hasn’t he always taken care of her? Famous last words…

WHY YOU NEED A SUCCESSION PLAN

Most owners assume they will have time for business planning later. After all, they are running a business which can demand all of their attention. But as noted in the previous scenarios, not planning for business succession – especially in family-owned companies – is one of the major reasons why businesses fail when the founder leaves.

Not having a clear succession plan creates ambiguity at best and a vicious power struggle or inability to continue operating the company at worst. Founders need to have a reliable successor who is already groomed to take over. This means someone who has the technical and managerial skills to run the business. It also means transitioning key vendor and customer relationships ahead of time to ensure continuity of operations without the founder.

As we’ll explore in more detail in the next post, a family business owner also needs to ensure that he or she is financially able to retire while preserving jobs for other family members who want to continue working in the business.

Seller Financing: How Much is Too Much?

Seller Financing: How Much is Too Much?

by | Jun 11, 2013 | Advice

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Even when you have a viable business that is priced right, buyers are rarely willing or able to plunk down the entire sum in cash.

Traditional lenders have strict underwriting requirements for business acquisition loans and often require significant collateral to ensure repayment if the business doesn’t perform as expected. In addition, buyers will need at least 20 percent of the purchase price as a down payment.

If the buyer can’t borrow what they need, seller financing is another option. This means the seller “loans” a portion of the purchase price to the buyer, who pays it back from post-sale business operations. Usually the seller holds the right to take back the business if payments are missed, but as noted below, the seller’s security may be subordinated if the buyer also has conventional financing.

My friend Eric Williams, a business broker with Codiligent, LLC estimates that on average, seller financing accounts for 43 percent of the price paid for all business acquisitions. That’s a lot of skin in the game for a seller who may be counting on the proceeds to fund retirement or the purchase of a new business venture. For starters, the seller no longer calls the shots and thus can’t prevent the buyer from making unwise choices that affect profitability. Likewise, if the buyer also has conventional financing, the lender will most likely insist on first dibs to the collateral if the buyer runs into trouble.

If you are anxious to sell, seller financing may have to be part of the package. If so, do your best to ensure that you get enough cash up front to stay solvent and set an interest rate high enough to compensate for the risk of nonpayment and potential lack of collateral. But for those sellers who aren’t in a hurry, it may be wise to wait for the right buyer to avoid seller financing or at least reduce it to no more than 10-20 percent of the purchase price.