If you own a business and decide to sell, you would hope that sale becomes your big exit. You know what I mean. The exit that allows you to hire a driver, gardener, and of course, someone like Alice from the Brady Bunch (side note: Don’t feel bad if you like that show. I’d still watch it every single day if I could!). But before you begin using hundred-dollar bills to light your cigars, let’s talk about three very important facts you need to know as you prepare your SBA business for sale.
Your Buyer Will Have To Get Their Own Financing
I’ve had my fair share of calls from sellers who are in the midst of negotiating a deal for their SBA business who want to know the answer to this popular question: “Can a buyer take over my loan payments?” And while it would be ideal to simply pass your business loan along to the buyer, in most cases it doesn’t happen.
The reason it doesn’t happen is pretty simple. Most small business loans focus on BOTH the finances of the business AND the individual guarantor. In case you didn’t know, bankers are pretty conservative people. Nothing is ever easy with banks, and they always want to examine every situation in excruciating detail in order to be sure they don’t make a mistake.
When it comes to a new business owner assuming the debt of the old business owner, it will be essentially like applying for the loan all over again. And guess what will happen if the new owner isn’t as financially desirable as the old owner? They won’t allow the new owner to assume the debt. And guess what will happen if the bank feels the business isn’t performing well? Again, it won’t be allowed.
This is why in most cases the buyer should be trying to line up his or her own financing. As a seller, you don’t want your deal to be solely in the hands of your lender. If it works out, great. But the buyer should be looking at other options just in case.
In a worst case scenario, if your buyer can’t get financing, I’ve seen business owners take the risk of staying on the loan as a guarantor and hoping that the new business owner makes the payments. The risk there is that if the buyer fails to make the payments to you, your neck is on the line and will be the one the bank is breathing down.
Short Sales Are Possible When Selling Your Business
People associate short sales with residential homes, but it happens with businesses as well. In case you don’t know what a short sale is, it means selling the business for less than what’s owed on it. If you sell your business for $100,000, but you owe $200,000, you have a short sale.
While a short sale is never anyone’s first choice, they are fairly routine in my world. Not ideal, but still a workable situation. There are a couple of things you need to know about short selling your business:
- A) Your Bank Will Need To Approve The Sale If You Come Up Short
The majority of business loans are secured by the asset of the business. This means if you want to sell your business for less than the full balance, you will need the lender’s permission to sell their collateral. It may seem like a minor thing, but it’s a HUGE deal to lenders. The SBA considers the sale of collateral without bank permission to be a fraudulent transfer of assets. In other words, even if it’s for a nominal amount, selling your business could sink any chance to settle a deficiency. This is especially true for SBA loans.
- B) Your Bank Will Need To See The Offer In Writing
Many borrowers want to get approval to sell their business before they ever have an offer. In other words, they want hypothetical approvals. “If I get an offer for $100,000, will the bank take it?” is the type of question I often get. The answer is that I have no idea. In order for the bank to consider the sale, they want something in writing. It can be a Letter of Intent or Sale Agreement, or whatever boilerplate document you want to use. The key is to have it outline the price and specifically what’s included (or excluded) from the sale.
- C) You’ll Still Be Personally Liable For Any Remaining SBA Loan Balance
If you still owe money after the sale, you will need to either repay it or negotiate a settlement on the balance. Keep in mind that when it comes to SBA loans, proceeds from the sale of the business will not be a credit towards a settlement. Any settlement cash would have to come from personal sources, not business assets.
You’ll Probably Need To Hold A Seller Note
This is particularly true of an SBA business for sale. If your buyer takes an SBA loan, it’s a standard feature that the seller will have to hold a note. Not ideal, but if the choice is to take a seller note for 10% of the price (or whatever the bank is requiring) or not close the deal, you might not have an option.
To add insult to injury, the seller note is usually subordinated to the bank loan. In some cases, I’ve even seen banks require no payments on the seller note for a period of time. And if the borrower defaults on their SBA loan, the SBA can write it into the agreement that you (the seller) cannot take any action until the lender authorizes it.
Latest posts by Jason Milleisen
- 3 Things to Know About Preparing Your SBA Business for Sale - February 14, 2019
- Can I Sell My Business For Less Than I Owe the Bank? - January 7, 2019