In the first part of this article series, I discussed the first two steps in selling a martial art school – making certain you’re ready to sell, and determining the value of your business.
In the second installment, I covered finding a buyer and negotiating a price.
In today’s article, I’m going to explain the most common types of financing you’ll encounter in selling a martial art school (this is how you’ll get paid), and the legal pitfalls you may run into when selling your school (and how to avoid them).
Step #5 – Closing the Sale of Your Martial Art School and Getting Paid
This step marks the most delicate and danger-prone phase of selling a martial art school. A deal is more likely to go south at this point than it is at any other step in the process, except perhaps during sales price negotiations.
Why is that? Because this is where the rubber hits the road. It’s where all the little details of the sale get worked out before they go down on paper. Issues arise that you never thought of, and you’d be amazed at what silly little things some buyers will fuss over.
A lot of this is just nerves, the business equivalent of wedding day jitters. Think about it – this person is about to “marry” your business. They are bound to get a little nervous about taking on such a serious responsibility, don’t you think?
Well, it’s your job (or your broker’s job, if you hired one) to calm their nerves and capitulate on things that don’t matter much in order to close the deal. Often, you can compromise or yield on minor issues in order to have the leverage to stand firm on more important issues.
And, you should be aware that seemingly minor issues may be of major significance to your buyer. So, do not underestimate the power of holding out on something that is relatively minor to you, in order to use it as a bargaining chip later to get something that you want from the buyer.
Of course, once all the details are worked out it’s time to get paid. Now, there are a ton of legal considerations when selling a business, which I’ll get to in a minute, but first we need to talk about financing.
Common Ways to Finance the Purchase of a Business
There are a few common ways to finance the purchase of a small business. In no particular order, they are:
- 100% Cash payoff
- Third-party financing
- Cash-down plus seller financing
- Deferred payment earn-out deals
Let’s examine each so you’ll be familiar with these terms and so you’ll have an understanding of which options are in your best interests.
100% Cash Payoff
A full 100% cash payoff means just what it says, the buyer pays you cash (typically in the form of a bank teller’s check – large suitcases full of cash can draw suspicion these days) for the full sales price of your martial art school. Obviously, this is the most beneficial and desirable option for you as the seller, because there’s no risk on your part. If you can find a buyer who can pay cash up front, this is the best deal for you.
Third-party financing is the next best thing to a 100% cash payoff. While it may seem to be the same thing, in actuality it isn’t, and the reason for this falls squarely with the eponymous “third-party.”
In this case, third-parties are invested parties like banks and the SBA, and they will provide both you and the buyer with numerous hoops to jump through in order for you to get your money. Still, if a buyer has good credit and you can prove that your business is indeed worth the negotiated sales price, this is not a bad way to go since you get all your money up front.
Cash Down Plus Seller Financing
Cash down plus seller financing is pretty much self-explanatory. This is where the buyer puts a significant amount of cash down towards the sales price and you as the seller personally finance the balance. How much you get down and how much you finance is really between you and the seller; there are no hard and fast rules here. However, I suggest you get as much cash up front as possible.
There’s a lot of risk involved for you as the seller when you finance a portion of the sale of your martial art school. For starters, the place could go bust due to negligence or incompetence on the part of the buyer, and you could be left holding the bag for the balance on the note. Furthermore, if you failed to hire competent people to assist you in the sale of your business, you could leave yourself open to civil liability for any money that may be owed by the person who bought your business (which is another reason to hire a good attorney and a competent broker to guide you through the process).
But it’s not all bad and it’s not all risk. The upside is that you can always secure the note with real property and the business assets (as well you should). Also, you can charge interest on the note, which helps you maximize your sales price.
Believe it or not, this is the most common form of financing used in so-called “main street” business sales (main street businesses are those with a market value of between $100,000 and $1,000,000 – it’s a nicer way of saying “mom and pop business”). Your martial art school falls under this classification; therefore, in order to successfully sell your studio you need to be prepared to accept a deal that requires this form of financing.
Deferred Payment Earn-out Deals
Deferred payment earn-out deals are when payments on the purchase of a business to the seller are deferred for a specified period, based on the business hitting certain performance benchmarks or sales numbers. They are typically used when the owner stays on with a business after the sale in a management position, and are used as an incentive for the seller to perform in their future capacity as company employee.
Since it’s rare that a school owner would be selling to someone who wouldn’t take over in the capacity of school manager and head instructor, you shouldn’t ever need to consider using this sort of financing structure in the sale of your business. However, buyers love these terms, so don’t be surprised if they try to get you to accept a deal that involves deferred payment and earn-outs, even if you are not staying on with the business.
Legal Pitfalls With Selling a Martial Art School
There are numerous potential legal pitfalls involved with selling a martial art school. Chief among these concerns are issues with the legal transfer of ownership rights, transfer of trademarks and business entities, transfer of leases and real property ownership, and the transfer of assets owned by the business.
In addition, if you are financing any portion of the sale of the school, you really need to consider stipulating how profits should be used in the business. This will help ensure that the new owner doesn’t mishandle funds and tank the business. There should also be stipulations that prevent the buyer from selling off business assets until the balance on the note is paid off in full.
These are just a few of the numerous legal considerations that must be taken into account when you sell your martial art school. I strongly encourage you to get a good business attorney as well as a qualified business broker to help guide you through the sale of your school. If you already have a buyer, some business brokers will work on a flat fee to assist you with closing the deal and finalizing the process, and their fee will likely be well worth it in potential troubles you’ll avoid down the road.
Now that we’ve covered the first five steps to selling your martial art school, in the next and final part of this article series I’ll go over succession and post-planning, which are vital to the success of the school after the sale.