Seller Financing: The Basics

Photo Credit: Iman Mosaad via Compfight cc

Photo Credit: Iman Mosaad via Compfight cc

Seller financing has always been a mainstay of Business Brokerage.  Buyers typically don’t have the capital necessary to pay cash, are unable to borrow the money, or are reluctant to use all of their capital.  Buyers also feel that a business should pay for itself and are wary of a seller who wants all cash or who wants the carry-back note secured by additional collateral. What sellers seem to be saying, at least as perceived by the buyer, is that they don’t have a lot of confidence in the business or in the buyer or perhaps both.  However, if you look at statistics, it’s apparent that sellers usually receive a much higher purchase price if they accept terms.

Studies reveal that, on average, a seller who sells for all cash receives only about 80 percent of the asking price.  Sellers who are willing to accept terms receive, on average, 86 percent of the asking price. The seller who asks for all cash receives, on average, a purchase price of 36 percent of annual sales while the seller who will accept terms receives, on average, 42 percent of annual sales.  These are compelling reasons for a seller to accept terms.  Business brokers have long been aware that reasonable terms are necessary if sellers are serious about selling their businesses.

The primary reason sellers are reluctant to offer terms is their fear that the buyer will be unsuccessful.  If he or she should stop making payments, the seller will be forced to take back the business, hope that the buyer can resell the business, or forfeit the balance of the note.  Another reason is that sellers feel that they can do more with cash than with the receipt of monthly payments. How often do sellers say that they need cash so they can buy another business?  That is probably not the real reason, but selling their business may be the only time that they can get a “chunk of cash.”  A Certified Business Broker can help alleviate these fears by pointing out some of the ways sellers can protect their investment and by explaining some of the advantages of carrying the balance of the purchase price.  Equally important is how the deal itself is structured. In other words, the key is knowing how to properly structure the seller carry back note to reduce the probability of default.

Let’s first take a look at the advantages to the seller of financing the sale:

  • The chances of the business actually selling are much greater with seller financing.
  • The seller will achieve a much higher price for the business with seller financing.
  • Most sellers are unaware of how much the interest can increase their actual selling price. For example, a seller carry-back note at 8 percent carried over nine years will actually double the amount carried.  $100,000 at 8 percent over a nine year period results in the seller receiving $200,000.
  • With interest rates currently low [at this writing], sellers can get a much higher rate from a buyer than they can get from any financial institution.
  • Sellers may also discover that, in many cases, the tax consequences of accepting terms are a lot more advantageous than those on an all-cash sale.
  • Financing the sale tells the buyer that the seller has enough confidence that the business will, or can, pay for itself.
  • The seller may be able to borrow some cash using the note and security agreement as collateral.  It may not be as easy as borrowing against real estate notes, but it’s still better than nothing.

Bottom line, in today’s environment seller finance is essential in selling a business.

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M&A Business Advisors represents sellers and buyers of privately owned businesses in a wide range of industries in California and Nevada. Our services include Selling a Business, Buying a Business, Mergers & Acquisitions, Business Sales and Acquisitions, Valuations, Opinion of Value, SBA Finance and Business Consulting. Sell your Business, Buy a Business, How do I determine the Value of a Business, How do I Sell my Business Confidentially, What is a Safe Way to Sell my Business, How long does it take to Sell a Business, How do I Sell a Business in California, How do I Sell a Business in Nevada, Search Businesses for sale. We represent Sellers and Buyers in Southern California, Los Angeles County, Orange County, Ventura County, Santa Barbara County, Kern County, San Bernardino County, Riverside County, San Diego County, Los Angeles, Torrance, Gardena, South Bay, San Fernando Valley, San Gabriel, Upland, Woodland Hills, Chatsworth, North Hollywood, Van Nuys, Burbank, Glendale, Pasadena, Santa Clarita, Palmdale, Thousand Oaks, Ventura, Camarillo, Newport Beach, Irvine, Anaheim, Brea, Northern California, San Jose, San Francisco, Oakland, San Ramon, Napa, Sacramento, Nevada, Northern Nevada, Southern Nevada, Reno, Carson City, Tahoe, Las Vegas.