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How do I handle an unqualified buyer?

Question

I have a buyer who is interested in my business but does not seem to have enough cash. What should I do? Someone has approached me, and they are interested in my business, but the deal looks a little skinny. It doesn’t appear as if the buyer has enough liquidity to purchase my business. What are my options? 

 

Answer

 


Let’s discuss the three general options you have:

  1. SBA Financing: We recommend getting your business pre-approved for an SBA loan if your business is worth less than $5 million. Yes, that means “your business” — and not the buyer — pre-approved for a loan. The most popular loan for purchasing a business is the 7(a) loan. This loan requires a 20% down payment. However, if you structure the sale properly, you can reduce this requirement to 10%.
    • This requires that you take action. Once your business has been pre-approved, you may also have the buyer pre-approved as well. However, don’t reverse these steps.
  2. Net Worth: Alternatively, the buyer may be able to access the equity in their other assets, such as equity in their home or their retirement account.
    • We recommend going back to the buyer and simply asking them if they can liquidate any assets and provide a larger down payment.
  3. Investors: Friends, family, and fools. A last resort for the buyer is to seek money from investors. Note that this is commonly used by foreign investors, but this approach is not commonly used by US-born citizens.
    • If the buyer claims to have potential investors, we recommend communicating with them directly. Investors will not make an investment without seeing information on your business, so they should also sign your non-disclosure agreement.

There is also a fourth option: offer more seller financing. We assume, however, that you would explore the three options above first before offering additional seller financing.

Preparing your business for sale will help you respond to the issues that will come up with interested buyers. Knowing your options for financing can keep the lines of communication open between you and a potential buyer.

 

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