{"id":421,"date":"2021-04-14T15:39:32","date_gmt":"2021-04-14T21:39:32","guid":{"rendered":"https:\/\/www.connect4commerce.ca\/resources\/?p=421"},"modified":"2022-05-09T15:21:19","modified_gmt":"2022-05-09T21:21:19","slug":"should-you-provide-financing-to-a-buyer-of-your-business","status":"publish","type":"post","link":"https:\/\/www.connect4commerce.ca\/resources\/business-news\/should-you-provide-financing-to-a-buyer-of-your-business\/","title":{"rendered":"Should You Provide Financing to a Buyer of Your Business?"},"content":{"rendered":"\n

The Pro\u2019s and Con\u2019s of Providing Buyer Financing for Your Business.<\/h2>\n\n\n\n

by Bruce Tannas<\/a><\/h6>\n\n\n\n

If you are like many small business owners, your business represents your largest investment of time and money. The sale of your business also likely represents the potential to reap the rewards of the investment in your business so you can move on to a new opportunity or retire. So, it is not surprising that you might be hesitant to provide any financing to a potential buyer of your business. But for many potential buyers of your business having some vendor financing may be the only way they can purchase your business.<\/p>\n\n\n\n

Background on Financing a Business Sale:<\/h4>\n\n\n\n

As you consider all the aspects of selling your business, you will also need understand how most purchases of a business are financed. Very few businesses are sold as a cash sale where the buyer has cash in hand to purchase a business, so some form of financing is needed to complete the sale. The typical sale of business will include financing from multiple parties including the buyer (which may include money from the buyer\u2019s family), bank loans and\/or developmental bank loans (e.g., Community Futures<\/a>, Business Development Bank – BDC<\/a>, etc.), and some seller financing.<\/p>\n\n\n\n

Most banks will use the Canadian Small Business Financing Program<\/a> (CSBFP) to finance the lion share of the purchase of the business. This program is a guarantee program, like the Canada Mortgage and Housing guarantee, that the Government of Canada offers the banks in order encourage them to finance small businesses. Loans, made through the program, can finance the purchase or improvement of land or buildings used for commercial purposes, the purchase or improvement of new or used equipment, and the purchase of new or existing leasehold improvements (e.g., renovations to a leased property by a tenant). While this government program, which is accessed through the mainstream banks, can finance a significant portion of the purchase it does not cover everything. It will not cover financing items such as goodwill, working capital, inventories, franchise fees, or assets that a holding company acquires. Those items must be covered by other means such as buyer investment, developmental lenders, alternative lenders, and vendor financing.<\/p>\n\n\n\n

Financing working capital and inventories is possible through the banks or developmental lenders as well. Depending on the strength of the client and the business cash flow the banks and\/or developmental lenders will provide finance a portion of the inventory to be purchased. In addition, the purchaser may be able to finance some working capital using a line of credit or up-front term loan either through a traditional bank or developmental lender. Having said that, there will be an expectation that a higher percentage of working capital amounts will come from the buyer.<\/p>\n\n\n\n

Financing goodwill (the value of your company\u2019s brand and market position) is much more difficult, though possible, to finance. Because there is no tangible asset associated and it is often hard to determine the true value of goodwill, so most banks and developmental lenders are reluctant to lend for goodwill. So, this is where vendor financing often comes in to complete the financing of a sale.<\/p>\n\n\n\n

For example, if a business is sold for $90,000 with $50,000 of equipment and fixtures, $25,000 of inventory, and $15,000 goodwill, and needs $10,000 of working capital; the financing might look like this chart:<\/p>\n\n\n\n

To be financed<\/strong><\/td>Buyer<\/strong><\/td>Lender<\/strong><\/td>Seller Financed<\/strong><\/td><\/tr>
Equipment, leasehold improvements & Fixtures<\/td>$10,000 (20%)<\/td>$40,000 (80% through CSBFP)<\/td>$0<\/td><\/tr>
Inventory<\/td>$7,500 (30%)<\/td>$17,500 (70% through a bank or developmental lender)<\/td>$0<\/td><\/tr>
Goodwill<\/td>$3,000 (20%)<\/td>$0<\/td>$12,000 (80%)<\/td><\/tr>
Initial Working Capital<\/td>$3,000 (30%)<\/td>$7,000 (70% through a bank or developmental lender)<\/td>$0<\/td><\/tr>
Total Financed:<\/strong><\/td>$23,500 (23.5%)<\/td>$64,500 (64.5%)<\/td>$12,000 (12%)<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

As in the example, banks and developmental lenders won\u2019t finance 100 percent of anything and the typical percentage ranges from 40-80 percent depending on what is being financed and the industry the business is in. Hard assets such as equipment and fixtures are usually financed at a higher percentage than inventory or working capital. Goodwill, if it is financed at all, will be financed at a much lower percentage. The gap between what is financed and what is not financed by lenders must be made up by the purchaser and potentially you as the seller in the form of a vendor loan (sometimes called vendor take back financing).<\/p>\n\n\n\n

Pro\u2019s and Con\u2019s of Financing the Purchase of Your Business:<\/h4>\n\n\n\n

Pro\u2019s:<\/h3>\n\n\n\n