Selling Your Business With Seller Financing Make sure you weigh the risk before deciding to become the bank.
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While it's true that fewer business-for-sale deals are being made during the recession, it's not because potential buyers aren't looking. Across the country, there is plenty of buy interest in businesses, but a shortage of financing is keeping many deals from getting off the ground. As a result, sellers willing to finance at least part of a business sale are finding it much easier to get their businesses sold.
By offering seller financing, a business seller allows a buyer to make a down payment, agreeing to carry a note for the remainder of the purchase price. This way, the buyer only has to come up with a portion of the total price up front and can then pay off the remainder over time.
A seller's willingness to finance a portion of a business sale has always been a strong selling point for potential buyers, but in recent months it has become essential to many deals. With most business buyers unable to access the full amount of a business price from lending institutions, today's sellers are faced with the decision to either lower asking prices or work with buyers to overcome sale barriers.
While seller financing could be the key in attracting buyers and taking a sale to completion, sellers should be aware that it comes with risks. Here's what sellers need to know if they are considering "being the bank."
Be Aware of the Risk
There's no doubt that seller financing is an important part of today's business sales, but the fact remains that it's not the right approach for every seller. Before making the decision, sellers should evaluate owner-financing as a business investment that undoubtedly comes with risk. When providing financing, a seller stays tied to the business long after the sale has been made, counting on the new owner to turn profit and pay back the principal with interest. Unfortunately, success under the new owner is not guaranteed, and there's a chance the seller will face the loss of interest income and extra costs associated with collecting debt. For this reason, sellers should make sure they are confident with the promise of the business and the prospective new owner before financing a sale.
Require a Down Payment
Even after they've made the decision to offer financing, sellers shouldn't waive a buyer's significant down payment on the business. This way, they can minimize their risk by distributing a larger portion of it to buyers. It's usually in a seller's best interest to finance no more than one-third to two-thirds of the sale price, letting the rest fall on the buyer. In certain cases where a seller has a vested interest - such as selling to a family member - financing more than this is acceptable, but as the amount increases, so does the risk.
Use Financing to Your Advantage
Many sellers view self-financing as a last-ditch attempt to sell a business, but it can actually offer benefits that cash sales don't. Sellers can typically sell their businesses for 15 percent more by advertising a willingness to provide financing. Sellers can also use financing to multiply the principal value of a business through buyers' future interest payments. Most financed sales can bring in an average of 8 to 10 percent interest over a 5 to 7 year note.
Get Outside Help When Necessary
The idea of owner-financing might come with a do-it-yourself mindset, but trying to go it alone can lead to complications during a transaction. A loan between a buyer and seller comes with a great deal of structures and variations that require input from legal and financial professionals to properly secure loan terms, collateral and adequate insurance coverage. Using these professionals when appropriate, can help sellers avoid headaches and sell their businesses much more smoothly.
Don't Be Pressured
No matter how important seller financing has become in today's business-for-sale marketplace, sellers who have done their homework and still aren't comfortable with the idea of offering it simply shouldn't do so. It's not rare for potential business buyers to try to strong-arm sellers into offering financing, but that's never a legitimate reason for sellers to go ahead with it. There's always an underlying reason why a seller doesn't feel comfortable with owner-financing, and going against this gut feeling could lead to regret. Owners on the fence can benefit greatly from arranging a meeting with someone who sold a business using seller financing and can speak from experience. Acting as the bank can allow owners to sell faster and reap financial benefits, but in the end every seller should step back and assess their individual situation before making the leap into seller financing.