Seller Financing

The Advantages You May Not Be Aware Of

When the business sales environment is filled with competition among sellers, a wise tip that helps make your business all the more appealing is by advertising your willingness to carry back financing on the sale of your business. There are benefits and drawbacks, but as long as you are prudent and stick to the rules you can position your business for a more rapid and profitable sale.

Top Benefits to Seller

  • Obtain Higher Selling Price – By helping buyers to better afford the purchase of your business, it can raise your selling price by as much as 10-20% higher.
  • Expands the Buying Pool – Increasing the affordability of your business opens up the opportunity to many more interested buyers. More buyers potentially means more interest and offers.
  • Residual Income – Receiving ongoing checks every month with interest added can generate additional funds for other things (like annual Hawaii trips, or Grandkids college funds).
  • May Reduce Taxes – While it smart to seek the advice of your accountant, he/she will likely tell you that you will reduce your capital gains on the sale of your business by providing seller financing.
  • Negotiate Better – By being willing to do what other sellers may not, you give yourself stronger leverage in negotiate other terms of the sale such as price, contingencies, non-competes, etc.
  • Strengthens Perception of the Business – When buyers know that you are willing to take a long term stake in the business by accepting delaying full payment of the proceeds it builds their confidence in their investment.
  • Business or Assets Become Collateral – If the buyer defaults on payments to you, the worst case scenario may be that you get the business back after the buyer has already paid you months of note payments and a hefty down payment. Even then, you are able to take back the business and when you are ready, sell it to another buyer.

Drawbacks to Seller

  • It is a Gamble – There is no doubt, there is risk when providing seller financing. And, you retain a share of risk until the note is paid off. Seller financing is wise for many sellers, but not for all. It is important to get the help of your Biz-Sell Advisor and other professionals to mitigate all risks as much as possible.
  • Tied to the Buyer – At the very least, for the duration of the note you are tied to the buyer and the business. Unlike all cash transactions, there is still some interaction to be had with the buyer.

Rules of Seller Financing

  • See it as a business investment – You have to take a long term perspective on providing seller financing in the sale of your business. It is not just something to do just to “get the deal closed”.
  • Get Their “Skin-in-the Game” – A seller should always require a healthy down payment of no less than 25% of the purchase price. The more the better, and if you can negotiate up to 2/3’s of the purchase price as down payment that significantly strengthens your position.
  • Trust But Verify – During the due diligence phase of the sales process, just as you are proving the business’ financial strength to the buy, so too he/she must do for you. And, it is all the more important when providing seller financing to verify the buyer’s assets, net worth, credit worthiness, business acumen, and more.
  • Collateralize the Note – Your best protection should the buyer default on paying you is to hold as much collateral as possible. The obvious would be holding the business itself or any valuable equipment or data as collateral. Buyer defaults, you get the business back! Additionally, a personal guarantee on the buyer’s personal assets will help tremendously.
  • Secure Your Position – File a lien with the State of California to give constructive notice to the world of your position as a lien holder on the business.
  • Competitive Interest Rate – The interest on the loan should be negotiated at near the prevailing commercial interest rates being charged at the time. Bankrate.com can help with that, but it’s never a good idea to charge 0% even to family.
  • Time is Everything – It is important to make certain the length of the term of the note is short enough to get you paid off as soon as possible, but also long enough that the buyer payments are low enough to be paid by the business’ cash flow and still provide him/her a living.
  • No Long Delays In Default – Make sure the deadline for bringing late payments current is no longer than 30 – 60 days at the maximum.
  • Again, seller financing is a wise approach to selling a business for many sellers but not for everyone nor every deal. Your Biz-Sell Advisor can help to greatly reduce your risk in providing seller financing.

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