Bunch: Selling Your Shop: Financing (Part 4 of 6)

Sept. 15, 2023
In the fourth installment of his series, columnist Greg Bunch goes over the nuances of financing.

Next in our series on selling your auto repair shop, we'll explore an aspect of the sale process that often comes with questions and complexities: financing. I will discuss seller financing, including its pros and cons, and how to structure a sale with a family member or employee. We'll also delve into what a bank or lender will want to see when financing a business purchase. 

Should You Consider Seller Financing? 

Seller (or owner) financing is when the seller agrees to finance all or part of the purchase price, essentially lending the buyer the money, which is then repaid over time. This can be a viable option if the buyer doesn't have the total upfront funds or can't secure enough financing from traditional sources. Here are a few reasons why you might (or might not) want to consider seller financing: 

Pros 

  • It can make your business more attractive to potential buyers, increasing the likelihood of selling your auto repair shop faster. 
  • You can usually negotiate a higher sale price for your business and earn interest on the loan, providing an additional revenue stream. 

Cons 

  • There's a risk that the buyer might default on the loan. While you can reclaim ownership of the business, it could be in worse financial health than when you sold it, and you could be financially tied to the business, limiting your options for future investments. 

Structuring a Deal with a Family Member or Employee in Small Auto Repair Shops 

Selling your auto repair shop to someone you trust, a family member or a long-time employee brings peace of mind to many business owners. Knowing your livelihood and the customers you’ve served will be in good hands is invaluable. However, putting a deal together isn't always straightforward; it's a blend of personal relationships and financial planning. 

Determining a fair price is step one of any successful transaction. It's important to leverage the expertise of an independent appraiser. This neutral assessment ensures that the sale price isn't just equitable but can also stand up to any potential scrutiny from tax authorities or other parties. 

But even with an agreed price, immediate payment isn't always feasible. Many family members or employees may lack the upfront capital for an outright purchase. This is where creativity in structuring the sale becomes crucial. One popular approach is the structured payout or "earn-out" plan. This model allows for an initial down payment followed by a series of scheduled payments. The business can even be tied into these payments, creating an incentive for the new owner to maintain and grow the enterprise. 

Tools like phantom stock or synthetic equity can provide a solution. These programs can give employees a stake in the business's success without diluting ownership. They offer financial rewards tied to the company's valuation, creating a sense of ownership and commitment crucial for the often-hands-on nature of auto repair shops. This is usually set up 5 to10 years before the expected transaction is set to take place. 

Even with the best financial arrangements, it's important to maintain a level of professionalism. This transaction isn’t just between family members or friends; it's a business deal. Contracts, legal protections and clearly outlined terms protect both parties and prevent misunderstandings. The saying "Good fences make good neighbors" can apply just as well to business dealings, ensuring everyone understands their responsibilities and rights. 

Tax implications are another significant concern. Gifting shares or leaving the business as an inheritance is an attractive way to bypass these issues. Selling can potentially minimize their tax burdens by leveraging the lifetime gift tax exclusion or taking advantage of stepped-up basis rules. Still, such decisions require careful consultation with tax and financial advisors. Other strategies, such as installment sales, can also spread out tax liabilities, making the transition smoother and more financially palatable. 

Finally, a smooth transition isn't just about money changing hands. It's about ensuring the ongoing success of the business. Whether it's training the new owner, introducing them to your suppliers, or being available for advice, planning this handover phase is vital. 

With careful planning, the right financial strategies, and an emphasis on professionalism, both seller and buyer can navigate this transaction successfully. 

What Will a Bank or Lender Want to See? 

If a buyer is looking to finance the purchase of your auto repair shop through a bank or other lending institution, they'll need to demonstrate the financial viability of your business: 

  • Strong Financial Performance: Lenders will look for consistent profitability and a positive cash flow. 

  • A Solid Business Plan: A detailed business plan outlining the post-acquisition growth strategy will be needed, especially for an SBA loan. The buyer's credit history and personal financial statement will also be scrutinized. 

  • Collateral: Lenders will want to see assets that can be used as collateral in case the buyer defaults on the loan, and unless it’s an SBA 7a loan, they will want to attach real estate. 

Financing is a critical aspect of selling your auto repair shop, and it's important to consider all options and their implications carefully. Remember, it's always a good idea to consult with financial and legal professionals to understand the best path forward, but also know they are paid to protect you and can tend to be over-cautious.  We will talk more about real estate in my next article. 

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