Seller Financing can actually be Good for the Seller
I know that as an owner, your preference when exiting your business is probably that the new
owner simply writes you a check and you move on to your Life Beyond Business. TM
I’m not going to say that this never happens, but let’s just say that it is pretty rare!
The fact is that depending on the availability of credit from the financial markets and the cash and assets the buyer has available, it may be that you will need to consider financing at least a portion of the transaction in order to close the sale of your business.
In the case of seller financing, you, as the lender, carry no more risk in the way of security and re-payment than a financial institution would. It just means that you are willing to assume the role of a lender in order to make the deal happen for the right buyer.
Seller financing is often a key factor in the sale of a small business, but also occurs in the sale of larger businesses, and the financing is sometimes referred to in other terms.
An “earn out”
…for example, refers to a sale in which the seller bets on the continued performance of the business over time and agrees to defer his/her receipt of at least a portion of the selling price until sometime in the future.
The fact is this is still seller financing.
The advantages of seller financing include the following:
- The odds of the business actually selling, and in a timely manner, are much greater.
- Studies show that sellers who agree to seller financing receive 86% of the asking price, while sellers who demand all cash receive only 70%.
- When a seller agrees to help finance the sale, he is sending a message that he has confidence in the future success of the business. Demanding “all cash” may signal the opposite.
- Even with the seller helping finance the sale, the buyer must produce a hefty down payment. This non-refundable payment provides security for the seller and signals the commitment of the buyer.
- Sellers can charge higher interest rates than a financial institution can, and the interest paid by the buyer increases the actual selling price of the business.
- The tax implications of seller financing are more advantageous than an all-cash sale as the seller amortizes the total taxes due over the length of the financing agreement.
When selling your business, you may worry that the buyer could default at some point during the term of the contract.
This concern is valid, but let’s looks at the facts about seller financing:
- The buyer has invested a considerable amount of cash up front, so default is going to cost him big time! Walking away is not a good option for the buyer.
- Second, this is your business, you know the cash flow. You should be able to tell going into the sale whether the business can support the payment requirements of your seller financing agreement.
- Finally, as long as the buyer owes you money, you will still be checking in periodically to protect your investment. You will know in advance and have time to address any problems that might arise.
Seller financing does involve risk for the seller, but it may be the best or only way to sell the business, especially in a tight credit market.
Add to that the number of businesses on the market as baby boomers approach retirement, and seller financing may be the best way for you to achieve your Life Beyond Business. TM