Selling a business and seller financing is a big decision. A key factor in getting any business sold is financing for the buyer. How is the buyer going to obtain the funds? There are obviously several options. Almost every seller would prefer cash at closing. Many times sellers eventually find a ready and willing buyer that would make a great business operator, but they may not have the ability to get all the money needed to purchase the business. Advertising the business upfront as – possible seller financing could make the difference of selling or not selling your business.
How does it work? The seller basically acts as a bank and loans a portion of the purchase amount to the buyer which allows the buyer to purchase the business. According to the quarterly International Business Broker Market Pulse report in the first quarter of 2016, the average amount financed by a seller through seller financing was 10% of the purchase price.
Seller Financing – PROS
Seller financing makes your business more attractive when your selling for several reasons:
1. It requires the buyer to bring less to the table – a lower initial investment, and that will attract more buyers.
2. It shows that you, the seller, have confidence in the business and its future.
3. Banks see that you have faith in the business and they tend to have more confidence in lending to the buyer.
4. Research shows, sellers get a higher selling price for their business – 20 to 30% higher than an all cash offer.
5. Seller financing can be a good investment. Interest rates for seller financing can be considerably higher than the banks lending rate and certainly higher than the rate you would receive in a interest bearing bank account.
Seller Financing – CONS
There are also some downside scenarios to be aware of:
1. Your loan is at risk for default.
2. You are normally in a secondary position to the bank. If the loan does go into default, the bank gets their money first and adequate funds may not be available to fulfill your loan
3. Many times the loan is structured with a stand by period. This means you may initially get paid interest only on your loan for a certain period and then a balloon payment, interest and principle loan payments or a combination.
Seller financing is negotiable. It’s not one size fits all. As the seller, you are in control and can offer this to buyers who meet your criteria.
Chris Kerth begins the sales process with a Free, No-Obligation Market Analysis. We only get paid when the deal closes.
Chris Kerth Murphy Business Advisers www.muphybusiness.com