Owner Financing info...

[Integraoligist]

Has anyone sold or used Owner Financing for their business? I’ve been looking at selling for the past 9 months and have had it up on the market but no one is able to get financing from the banks right now to buy.
Was talking to someone yesterday that said in the state that they are located in, most businesses and homes are Owner Financing.
So I was wondering about how it all worked out for everyone and how to advertise it?
Thanks!

 

[Piper]

My brother is currently selling a six store business (non-food related) that is a very large national franchise, extremely profitable and the youngest store in the group is 25 years old - and his interested buyers are still having trouble finding bank financing.

As a result, he just closed sales on two of the stores with owner financing. Here were a few things that have come up in conversation when we were discussing these deals:

• If the buyer wanted owner financing, the sales price was not negotiable. Full asking price was paid.
• The interest rate was reasonable, but higher than he would receive from a bank.
• More discretion was made in selecting a buyer. Without owner financing he needed a much more proven business operator than if somebody was paying him cash.
• Remember you are still very much at risk. You may shed the liability, but if it goes under you’ll never see your money.
• Unless you can afford to lose the entire investment, have a plan of action on how you’ll manage the store again in the event of a default.
• Have strict default terms in the loan. Notice of default goes out 10 days after payment is late, with 10 days to cure. After that, you own the store again.
• Make sure that all of your vendor accounts are closed and new ones opened for the new business.

 

[RobT]

I would be careful of this. You have to kinda figure out what a reasonable payment is for the buyer, because in the end, you may wind up taking the store back. Plus, what kind of damage to the stores reputation will the new owner do? I’ve seen this many times where an owner has to take back their store cause the buyer couldn’t keep up with the payments, or destroyed the place to unprofitability.

I would get a significant amount of money down, and make a reasonable payment for the buyer if you go that route.

 

[Piper]

RobT:

I would get a significant amount of money down

Forgot to put this in my post - those deals were all done with 50% down. That’s probably the most important part of the deal.

 

[pizzapiratespp]

5 years ago we financed a location we sold. We held a note for $40,000 to be paid over 3 years. A couple of months after that a mutual friend of me and the buyers offered me $30,000 for the $40,000 note. I needed the cash so I took it. A couple of months after that the buyers closed down the store and left the state. I got lucky on that one.

 

[pizzatime]

I have carried a couple of notes and have to agree with the above info.
In addition, make certain your contract states that if the buyer defaults on said loan, the note excellerates and is due within 7 days. If not paid in full (the complete note) you take over ownership and ALL monies paid by said buyer to you is forfeited.

Definitely get as much as possible up front.
Get callateral

The level of competence of a buyer with a low down payment is no better than the guy that comes in late,calls off or trys to get out of work.

You will be flooded with drunks, druggies and tire kickers when you place a ad that says owner financing.

pt

 

[The_Calzone_Kid]

I might be able to help you on this a bit. I have been in the process of paying off the previous owner since we made our agreement a bit over 2 years ago. He was actually a pretty good friend of mine, so it made it 100 times easier for each of us to go into this trusting each other. Here are some of the intial thoughts/questions I would consider…

Before advertising that you will finance to the public, do you have any current employees that would be ready to take that step? I had been at my restaurant for about 10 years, so the seller had that long to build up trust that his investment was safe. You will have much better idea who you can trust from a previous working relationship as opposed to interviewing random people.

Make sure to have YOUR lawyer draft the agreement. As stated above, dont allow any changes to price, interest, length, etc.

Be careful not to overcharge or undercharge your monthly payments. I bought my place about 3 months before the recession hit our area so my payments are based off pre-recession sales/numbers. If I were to pay the place off tonight magically, and want to sell through owner financing, I would only expect about half of what I currently pay monthly due to the struggling economy. So find a safe medium for both parties.

Definitely have a clause where you retain some ownership in equipment. If I knew I was close to default and would be losing the place soon, I would sell off higher priced equipment and give him back an empty store.

If the new owner fails, the business will probably be completely worthless at that point. You might have to find new vendors, be months behind on rent, have no customer base remaining, etc.

If this helps at all, I’m paying a 9% interest rate. I paid 15% down and the loan is over a 7 year period. That is from a 2008 purchase.

I hope some of this helped!

TCK

 

[bodegahwy]

More than half of small businesses are sold with some seller financing. The points made above are key:

1. Substantial down payment
2. Tight conditions on default.
3. Payment must be realistic for the buyer.

Typical interest rate on financing is 6-9%. Typical term is 3-10 years.

Having some seller financing will actually help a buyer get bank financing (with the seller financing subordinate) because the bank views that as a fall-back adding security and that the seller will be motivated to ensure the buyer succeeds.

 

[Integraoligist]

thanks all for the info… i was doing more research into it and it sounds better and better for this type of climate we are in.

The list price for the business on the actual market was going to be $120k but it’s been sitting for 9 months with only 6 looks and 0 offers because no one seems to be able to get a loan.

I decided that I would be willing to sell for what my equiptment, building costs & inventory costs which is about $80k

I was thinking of having the Buyer put down around $15-20k with a 5-year term at 6% atomized with the stipulations that if payment is more then 10 days late they default and lose the business and all the money paid into the loan.

Thoughts?
Also, what about the advertising? How and were would I put this “Seller Financing Avalible” selling situation?

Thanks!

 

[pizza2007]

Integraoligist,

You seem to be going against the standard valuation process in determining a sales price.

equipment, building costs & inventory costs
mean ZERO to a buyer and as such are worth ZERO to a buyer. Those are costs you invested (for whatever reason) in your business. The buyer will do the same. **The only way you’re going to get those investment costs back is to EARN them. Else, its your cost (unrecoverable) for being in business.

I think the problem struggling businesses are facing when trying to sell, is that their business may not be ‘technically’ worth anything, and as such, very difficult to close on. If a business is only showing a profit of $50K/yr, investors with cash may see too much work associated with the profit. Others, without cash, may see an opportunity to have a job. <— that’s probably your biggest potential client!