A Deeper Look at Seller Financing When Selling A Business
A buyer typically has one of three ways to buy a business – Cash, SBA Finance or Seller Finance. Cash deals are rare and require a discount in the value to attract a cash offer. SBA Finance have pros and cons and can be expensive to obtain. Also, not all businesses can qualify for SBA or business acquisition loans. The bottom line is that most buyers don’t have the necessary capital or lender resources to pay cash and that is where seller financing comes into play. The fact is that seller financing is quite common in the sale of a business. It is estimated that approximately 70% of business sales involved some form of seller finance. In this article, we will take a deeper look at some of the key points to remember.
Is Seller Financing a Good Idea?
Many buyers feel that a seller’s reluctance to provide seller financing is a “red flag.” The notion is that if a business is truly as good as the seller claims it to be, then providing financing shouldn’t be a “scary” proposition. The truth is that this notion does carry some weight in reality. The primary reason that many sellers are reluctant to provide seller financing is that they are concerned that the buyer will be unsuccessful. This, of course, means that if the buyer fails to make payments, that the seller could be forced to take the business back.
However, it is important for sellers to look at the facts. Sellers who sell for all cash receive approximately 70% of the asking price; however, sellers receive approximately 86% of the asking price when they seller finance!
Seller Financing has a Range of Benefits
Here are a few of the most important benefits associated with seller financing: the seller receives a considerably higher price, sellers can get a much higher interest rate from a buyer than they can receive from a financial institution, the interest on a seller-financed deal will add significantly to the actual selling price, there are tax benefits to seller financing versus an all-cash sale and, finally, financing the sale serves as a vote of confidence with the buyer which will make he or she move forward with the transaction.
Clearly there are no guarantees that the buyer will be successful in operating the business. Yet, it is key that sellers remember that in most situations the buyers are putting a large percentage of their personal wealth into the purchase of the business. This is their “skin in the game” and can represent 30-50% down. In other words, in most situations, the buyer is heavily invested even if financing is involved. In addition, the buyer will provide a personal guarantee and there will be a UCC-1 on all the furniture, fixtures, and equipment including the name of the business, website, phone numbers, etc. An experienced Business Broker can also suggest other terms and conditions in the note to improve the seller’s position. All of these items along with a well-crafted promissory note can dramatically reduce the chances of having a problem but are necessary to complete a sale.
Business Brokers excel in helping buyers and sellers discover creative ways to finance the sale of a business. An experienced Business Broker can recommend a range of options and plans that can, in the end, often make the difference between a successful sale and failure.