Advice To Examine If Seller Is Financing A Business For Sale

A seller financing business is where the owner will personally finance a portion. This increases your chances of selling the business. Although it may be tempting to think about selling your business faster, you should seriously consider the implications of seller financing. What are the key points to consider before selling your business?

Six things to consider:

1. DO evaluate the risks. After the sale, you will still be responsible for the business

Contrary to a cash sale, where the seller can walk away with the money in the bank, a seller financing a business means that the seller remains tied to the company for a set period after the sale. The new owner will pay the principal and interest back if the business is successful. If the new owner fails to succeed, the seller may lose interest income or incur additional costs in collecting the debt.

Bottom line: A seller-financed sale should be viewed as a business investment. As with any investment, there are risks involved. It may be beneficial to finance the sale yourself if you feel confident enough to invest in the new owner. You will likely close the deal faster, get a higher asking value, and make income from the interest.

2. DO take advantage of interest-earning investments

A seller-financed transaction can be financed if you are willing to carry the note. This is an investment that will earn interest. The seller can reap significant benefits from self-financing if the buyer is a good investor risk. Many owners see selling a business to finance it as an attempt to get rid of it. Instead, they should view it as a way to increase the value of the sale.

Your willingness to hold on to paper immediately increases the final selling price. As a result, partially-financed sales are more expensive than cash sales. During negotiations, this allows you to leverage your financial willingness as a bargaining instrument.

Another benefit to selling seller financing is the possibility of increasing the principal value of your company through future interest payments. A financed sale will yield a higher rate of return than other investment vehicles that offer a 5-7-year note paying 8-10% interest. Of course, you must be firm in charging the right amount of interest for the market, and at the risk level, you accept.

3. When you list your business for purchase, advertise seller financing

A listing advertising seller financing can help you attract more buyers. You should mention that you can finance a portion of the sale if you feel comfortable. Seller financing can attract a wider range of buyers, even those who might not otherwise be able to finance the asking price. Listings that include information about seller financing generate a significantly higher number of hits on BizBuySell.com than listings that do not.

4. Don't forgo the down payment. You can reduce your risk by making a down payment

A seller financing a business can be risky. A healthy down payment can reduce your risk by sharing the risk with the buyer. Business loans require a higher upfront investment than home mortgage lenders, who may require a downpayment of 15% or less.

It is generally best to finance between 20-50% and 20% of the sales price. Of course, you must have a valid reason to finance more than this amount. If you're selling your business to a relative, for example, you might have a vested right to finance an amount that is higher than the usual range. However, your risk increases as you increase your financial commitment.

5. DON'T do it yourself. Instead, trust someone to give you legal and professional advice

Seller-financed transactions for business sales are, by definition, shades of DIY. Instead of using professional lenders to finance your business, the seller will take on a portion of the buyer's investment. Hire someone with experience in the field to help you.

Don't let yourself get carried away by the "do-it-yourself" mentality. There are many ways to structure a loan between seller and buyer. Many of these structures can be complicated and require professional advice. Professionals are needed to ensure adequate insurance coverage, sound collateral, and loan terms. Get legal and financial advice before you agree to finance.

6. Do not be pressured. Trust your instincts

Potential buyers may try to get a seller-financed deal. This is especially true for buyers who are unable or unwilling to borrow money from traditional lenders due to a low down payment or other borrowing difficulties.

It doesn't matter how anxious you may be to sell your business; giving in to buyer pressure just for the sake of closing the deal is a huge mistake. If a buyer insists on seller financing, it is a mistake to take a step back. If you don't feel comfortable financing the buyer, leave and wait for a better buyer.