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Owner financing is a sensible way to sell a business and extremely common all over the United States. Offering to finance the purchaser of your business can help you sell it quickly, may provide tax benefits and will give you a nice source of monthly income.
Of course, creating a high quality note is of primary importance. We strongly suggest employing the services of a competent attorney to represent your interests in the business sale and creation of the note. If you decide to finance the purchaser, you should negotiate the best possible terms and make sure your attorney drafts the documents. Here are some important tips and advice:
The sale price should be nothing less than the business's fair market value. There is no reason to discount the price if you are financing the purchaser. Donít allow the sale price to be negotiated below market value Ė and then have the buyer ask you for owner financing.
The down payment is the purchaserís initial investment in the business. The larger the down payment, the more motivated the purchaser will be to protect his investment. Consider carefully: Would it be wise to sell your business to a buyer who is unwilling or unable to financially commit himself to the business you are selling. A minimum downpayment of 30% down is recommended.
The interest rate you charge should be a function of the down payment, credit worthiness of the buyer and number of scheduled payments. The rate should be higher than the interest rates being charged by banks. Don't be afraid to require at least 1% to 2% higher than conventional lending sources are charging.
Professional lenders donít lend money without reviewing a credit report on the borrower and you shouldnít either. Just like any creditor, you have the right to information that shows the buyer has an adequate source of income to pay the note obligation and has a good credit history. If selling to a person with less than good credit insist on a larger down payment.
The amortization of a note refers to how many payments are scheduled. For business notes it is recommended to keep the term at five years or less.
It is very important that you have a competent attorney represent your interests in the creation of documents and at the closing. As the seller, the financing documents protect your interests. Your attorney should prepare these documents. After the closing, be sure your new security agreement is recorded immediately to protect your interests.
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