Call us today 877-557-0222


<< Back To Blog

Should You Consider Seller Financing When You Sell Your Business?




Seller financing is something we bring up with every deal we broker. We’re not surprised when the answer is “no;” almost every owner declines at first. After all, that’s why they’re selling – to get out of the business. But most change their minds when they hear how they can benefit.

First, seller financing expands the pool of available and qualified buyers. A buyer usually has to come up with 20 percent of the sale price as a down payment for the lender. If a seller is willing to finance even 10 percent of the note, he has cut the down payment in half, allowing more buyers to consider a deal.

Seller financing also increases the liquidity of a potential buyer. The more a seller is willing to finance, the more capital the buyer has available for operating costs, improvements, or other investments in the business. This increases the buyer’s potential for success, which is good for both parties.

Keep in mind that until 2010, the SBA required lenders to obtain seller financing. Their policy stated: “In addition, a lender should require as much seller-financing as possible with the seller-financing having a subordinate lien to the SBA-guaranteed loan on the business assets. A rule of thumb for the amount of seller-financing that should be required is the amount being borrowed by the buyer to finance the acquisition of intangible assets such as goodwill.” The SBA believed it was essential for sellers to have skin in the game.

When the SBA dropped that policy, it became discretionary for lenders to ask for seller financing. Most lenders don’t require it except in cases where the buyer may not be in a strong enough financial position to service the full debt burden.

We recently closed a $7 million deal that required seller financing because the SBA lender limit is $5 million. The owner might not have been able to find any qualified buyers without financing part of the sale or accepting a much lower price. One of the primary benefits of seller financing is the ability to get more for your business than if you limit your options to traditional lending.

Being willing to finance the sale also sends a strong signal to the buyer that the owner believes in the business and is confident it can continue to be profitable. Buyers worry that an owner who wants out right now with no ongoing concern in the venture may know something they don’t. They may decide to pass and look for a business the current owner seems to have more faith in. When sellers continue to have a stake in the business, buyers also believe they’ll be more likely to be helpful and responsive to the new owner. After all, they’re taking on this risk together.

Sellers often negotiate a higher rate of return than lenders, so they can benefit both by the interest payments and in reduction of tax liability. Sales involving financing are considered installment sales, so capital gains taxes are paid over the course of the contract.

Seller financing mitigates some of the seller’s risk because the new owner has more liquidity and benefits from the owner’s continued interest in the business. But it also presents opportunity risk; the seller has less capital to invest in new ventures. If the buyer struggles, the seller may need to involve himself in the company again. If the new owner eventually fails, he may find himself taking over the business, back at square one, albeit with the cash from the sale at his disposal.

When most owners take a clear look at the pros and cons of seller financing, they are open to the idea. Nationally, somewhere between 60 and 90 percent of business sales include seller financing, which makes sense. Entrepreneurs who took some risk to start their business are often willing to take on some risk to sell it.

 








About Franchise Clearly®
Franchise Clearly® specializes in reselling franchise businesses. Working with owners, they work through a defined proprietary process that finds highly qualified buyers and guides them quickly to the closing table. Their innovative team approach makes for a seamless process that nets the highest offer and the best terms possible for the seller.





-->

As Seen On