Buzz Harris: Minimizing risk important when selling and buying a business (Voices)
Whenever I meet with business sellers, they want to know how to protect themselves in a way in which the new buyer meets the financial obligations and a smooth transfer of ownership occurs.
For many sellers, protecting themselves is more important than determining the value of the business. What sellers need to keep in mind is that there is just as much risk in selling a business as there is in starting a business.
Similarly, they can minimize their risk when selling as they did when starting the business.
Although there are no guarantees, a combination of the following can significantly reduce the risks to an owner selling their business.
Many of these suggestions, such as having an adequate training period for the new owner, having a good client base, having strong relationships with suppliers, etc., are obvious. However, many are not.
One common mistake is not getting enough of a down payment. Few incentives inspire a new owner to succeed like the risk of a significant loss of their own money. In simple terms, it is a lot harder to walk away from a $200,000 down payment than a $20,000 down payment.
Be sure to know the buyer. This means more than having some of the same interests, common friends and a shared love of the sports team. A seller needs to thoroughly review the buyer’s credit history, personal financial situation, accomplishments and life experiences.
Also, a well-intentioned but common error sellers make is having a due-on-sale clause in the promissory note. In some cases, buyers find that being a business owner is not what they thought it was going to be, or something has occurred in their life, which has changed their desire to own the business.
This is exactly what happened with a local home-improvement contractor. An out-of-sate family matter for the new owner forced the owner to leave the Reno area.
Instead of closing the business without meeting his financial obligations to the original seller, we helped him find another buyer who met his conditions as well as the obligations to the original seller.
For the original seller, this meant that instead of having one buyer on the promissory note, he now has two.
Buzz Harris, a Licensed Business Broker with The Liberty Group of Nevada, writes a recurring Voices column for the Northern Nevada Business Weekly. Contact him at 775-825-3948 or via email at BHarris@TheLibertyGroupofNevada.com.
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