Financing The Purchase

I received an email this week from someone who is in the throes of a negotiation for a small food service business. He came across the Diomo website (www.diomo.com ) while searching business listings and sent me a question (I am always happy to answer these so if you have any questions, contact me). He and the seller have settled on a $600,000 purchase price. Deal terms are $200,000 down and the seller has agreed to carry a $400,000 note over 6 years at 9%. Sounds good so far, doesn’t it?

I can’t state whether it’s a good business to buy because he omitted too many details, except that the company has experienced consistent revenues and Owner Benefits in the $200,000 – $250,000 range over the past three years. At face value, it looks very good but here’s the problem: the seller wants the buyer to personally guarantee the note and the buyer steadfastly refuses to do so. The business has zero assets except inventory and some office equipment.

I think the buyer was shocked when I sided with the seller.

Providing a personal guarantee is reasonable, normal, and expected.

You cannot expect a seller to finance any part of the sale, let alone 2/3 without some assurances.

In this case, there is no personal collateral being pledged. On this point, you should not pledge personal collateral in a seller note; the assets of the business are enough. However; executing a promissory note including a personal guarantee makese perfect sense.

As a prospective business buyer, you must get comfortable with this concept. Just as you want the seller to have “skin in the game” by providing financing, so too must you offer some exposure for this to happen.

Besides, a personal guarantee while not to be taken lighly, is by no means bulletproof for the holder of the note. Chances are if you cannot make the payments, the business must be faltering badly. In all likelihood, the seller’s best recourse would be to take over the business.

I don’t want to be the conveyer of doom and gloom. Good businesses, run by the right people, rarely fail. That is not the point of this posting. Rather,

I want you to understand what you can expect in a seller note and rest assured, a personal guarantee to a seller is almost always infinitely more lenient that what most SBA backed loans require (rumor that the bank wants your first-born has neither been proven or dispelled).

X

Webinar Registration

    X

    Reserve Your Seat Now!