Expert Answer

Lance Hood:               Let's get into the financial strategies that people will need to secure a smart purchase. Richard, how do you avoid pledging your personal assets so you can get away with the absolute bare minimum?

Richard Parker:           Well you should never pledge your personal assets. That's why seller financing is so wonderful. When banks are involved, sorry Charlie, you really don't have any choice. They're going to want to go after everything to be 100% collateralized plus more and pledge your first born.

                                    In seller financing there's no transaction, there's no debt that you could typically ever incur with a third party in your life where you're not going to require it to personal guarantee.

                                    But let's understand what a personal guarantee is. There's two types. There's a personal guarantee that you pledge when you get a mortgage for example, on your home. Property itself is the collateral. So you've signed personally and you've also pledged some of your assets.

                                    There's loans where you go to the bank and you get a SBA loan to buy a business where you've signed personally, and you've given them a second mortgage on your house, and you've pledged certain CDs or equalities that you may have as additional collateral in addition to the assets of the business.

                                    With seller financing you have to sign personally and that makes just good common sense. And, even though more often than not I'm on the buy side of the equation, it ties you to the business. I mean signing personally is just the normal thing. But with seller financing, you sign personally, but you're not pledging any personal assets. It's the assets of the business that collateralize the seller financing.

Lance Hood:               So what information should I expect the seller to want from me to make sure that I can fulfill my end of the bargain?

Richard Parker:           Number one, you need to impress them. Most importantly the only that note is going to get paid is if you're capable of running the business. And that's why when we talked about earlier about how important it is to impress the seller, about your acumen and your level of commitment, integrity, intelligence, et cetera and sincerity, that what impresses the seller. Because that's the - they're going to have these assets of the business, but they need to know above and anything else that you have what it takes to grow that business. Because no matter what else is in place, or how motivated they are, if they don't think that you're going to be able to keep running that business, they're not going to finance you. They're not going to finance you.

                                    On the other hand, if they're convinced that you're the guy to run the business, remember the story about the guy who bought - seller slapping his hand on his table where he said, "That's the guy." Right? "That's the guy. That's the guy I'm going to sell my business to." Well that's what you need them to think, that you're the guy.

Lance Hood:               So I shouldn't expect that they're going to want to see that I have proof of ability to pay for the business because they're assuming that I'm going to pay for the business though running it and making it successful.

Richard Parker:           Bingo. Go to the front of the class.

Lance Hood:               So that should relieve a lot of tension with people who think, "Okay, if I'm going to finance it, this guy is going to go, ‘Hey, this guy doesn't have a million dollars in his personal bank account." That's not the big concern. The big concern is they just want to know that you can run it successfully so they can get their money.

Richard Parker:           I tell people you have to prepare a financial statement. You're not going to be able to buy a multimillion dollar business with $5000 down. It's just not going to happen so we want to be realistic. We don't want to mislead people. I mean, never do that.

                                    So you want to prepare a personal financial statement, and the truth is if a seller wants to see it you have to be prepared to show it because you're going to ask them for financial information about their business. If you're expecting them to disclose that to you, you should be prepared to disclose your situation to them, and it's a case of being honest. But you don't need to do that from the beginning, number one.

                                    And number two, you wouldn't even imagine how many cases where businesses go from identifying the business, straight to the closing, and the seller's never ask the buyer for a financial statement because they're comfortable with them, and they know that this individual is going to pay them back through the proceeds of the business and nothing else. So it's more important to them that they understand that you have the ability to run the business.

                                    Now there are situations, the odd time where a seller says, "You know, I need a financial statement, and I want the loan collateralized." Well it doesn't happen and you don't have to give into to that. And if that's the case with a particular seller, and they've drawn their line in the sand, it's time to move to the next business. Because undervalued businesses to be purchased at incredible deals are available by the boatload as long as you know what you're doing.

                                    So don't get hung up on one that's next. I live in South Florida where a lot of the communities are the same cookie-cutters homes one next to the other.

                                    Well if you identify a certain community where you want to live and there's two houses for sale and one guy is completely hung up on a purchase price that's $30,000 more than the guy next to him, even though he may have a slightly bigger lot or whatever the case may be, it's more important you want into that particular area. You buy the other guy's house. You're in the neighborhood. It's the same house.

                                    Next, next, next, next, next. You have plow through these because the deals are there. And you don't have to spend a decade looking. The deals are there. The deals are there in abundance. You just have to be committed to the process and keep looking, and if it's not the right thing, it's next.

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