Selling a small business is commonly perceived as a headache for one simple reason: it is notorious for being extremely difficult, especially for those in certain niche industries.
A key difficulty that contributes greatly to the typical difficulty of offloading a small business is the rarity of finding a buyer who is able to fund the purchase, let alone finance it entirely. However, there are banks that are willing to provide financial assistance to an interested buyer.
One major pitfall of seeking financial assistance from a bank, however, is that it is easy to have an application denied due to tight lending conditions. Most banks fix a higher standard or more rigorous requirements on applications made for purchasing a small business. This is due to the fact that it can be especially risky and prone to a financial burden. This reality alone can make selling your business two to three times as hard, even more so when a buyer does not want to provide their real estate assets as collateral or security.
Fortunately, if you’re in a hurry to sell your small business, there’s one way to overcome the difficulty of immediate financing for your prospective buyer: vendor finance.
Vendor finance is the process that involves a seller providing financial assistance to their buyer through the use of deferring part of the purchase price they have set. In other words, you loan a part of the selling price of your small business to an interested buyer as opposed to getting a bank involved. Although vendor finance may be an effective method to cut out a middleman, avoid paying bank fees, and get a better price for your small business, it is no stranger to a fair share of risks.
Fortunately, the vendor finance approach can be kept as financially safe and viable as possible on your end through the process of assessing, adding interest, and restricting, or AIR. To ensure that you can unload your business as best as possible for utmost financial security, let’s look at the AIR approach in greater detail:
A – Assess your prospective buyer
Ensuring your safety when selling your small business involves having to assess your prospective buyer before proceeding with the financing process. When carrying out the assessment process before handing out vendor financing, banks wouldn’t lend your prospective buyer, which means that you have to cover all grounds for safety.
Your buyer’s credit history, documentation of any details related to their credit defaults, and summary of their assets and liabilities will all provide the necessary information for assessment, so ask for them to provide these right away.
I – Protect yourself with a security interest
As undesirable as it may be, the chances of your prospective buyer defaulting during repayment are there, which makes it essential to have an emergency plan. Adding security interest to the contract that you have with your buyer can provide a quicker and easier way to seize your business and resell it if a default were to happen along the way.
Security interest, in essence, functions as your main safety net in a possibly risky vendor financing deal. It is a vital factor to keep in mind when conducting formalities and laying everything out.
R — Restrict the chances of fraud
The structure of vendor financing is flawed to the point that you can easily be conned and robbed of what is due if you’re not careful. Adding certain restrictions—such as a personal guarantee and enforcing a mortgage over the buyer’s real property—can help tremendously with upholding your safety. With restriction, however, comes responsibility, so consult with a legal team (such as GLG Legal, if you’re in Brisbane) to ensure that every effort you make is in accordance with the law.
Following the AIR approach when letting go of your small business at a fair price can go a long way in ensuring that nothing undesirable happens when bringing vendor financing into the mix. Take these three crucial steps into consideration to avoid late payments, bogus vendors, and the risk of losing your business and money altogether!
If you’re looking for commercial lawyers in Brisbane, get in touch with us today to see how we can help.