Seller Financing: It Makes Dollars and Sense

An important component of selling a business is, frequently, seller financing.  Many potential buyers don’t have the necessary capital or lender resources to pay cash and, even if they do, they are often reluctant to put large sums of cash into what, for them, is a new and untried venture.  This is particularly true in the age of Covid-19 with an extra degree of uncertainty.  Seller financing has many advantages:

  • Seller financing greatly increases the chances that the business will sell.
  • The business will command a significantly higher price.  Industry statistics show that seller financing results in an average 30% higher price.
  • The interest on a seller-financed deal can add substantially to the selling price. (For example, a seller carry-back note at eight percent carried over nine years will double the amount carried.  Over a nine-year period, $100,000 at eight percent will result in the seller receiving $200,000.)
  • With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from any financial institution.
  • The tax consequences of accepting terms can be much more advantageous than those of an all-cash sale.
  • Financing the sale helps assure the success of both the sale and the business, since the buyer will perceive the offer of terms as a vote of confidence.

Why the hesitation of sellers to offer terms, even with these compelling reasons?  The primary reason is that sellers fear that the buyer will be unsuccessful and they will be either forced to take back the business (a very rare occurrence) or forfeit the balance of the note due.  The flip side of this is that the buyer knows that the seller is invested in the continuing success of the business.  Additionally, buyers often feel that, if the business is really all that it’s “advertised” to be, it should pay for itself over a reasonable period of time.  Buyers often interpret the seller’s insistence on all cash as a lack of confidence–in the business or in the buyer’s chance to succeed, or both.

Obviously, there are no guarantees that the buyer will be successful in operating the business.  However, it is well to note that, in most transactions, buyers are putting a substantial amount of personal cash on the line–in many cases, their entire capital.  Although this investment doesn’t insure success, it does mean that the buyer will work hard to support such a commitment.

There are many ways to structure the seller-financed sale that make sense for both buyer and seller. Creative financing is an area where your business broker professional can be of help. He or she can recommend a variety of payment plans that, in many cases, can mean the difference between a successful transaction and one that is not. Serious sellers owe it to themselves to consider financing the sale. By lending a helping hand to buyers, they will, in most cases, be helping themselves as well.

Copyright: Business Brokerage Press, Inc. and NEBP.


Adapted from It Makes Dollars and Sense which appeared on Deal Studio.

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