Early April Update: Benefits of Seller Financing

What About Seller Financing?

Some of the first questions potential buyers ask a business broker are: "How much is it?", "How much is it making?", and "How much money do I need to buy it?". Many sellers expect, or at least want, an all-cash sale. Interestingly, when asked if they paid cash when they purchased the business, most will respond with a "no." Many of those who say "yes" actually started the business from scratch as opposed to buying it. Most small business sales are financed either by an outside source or by the seller. An all-cash sale is quite difficult to get in today's economy. Actually, it was quite difficult to get in yesterday's economy.

Banks like to lend only against hard assets. The Small Business Administration (SBA), under its 7(a) program, lends money for a buyer to purchase an existing business, but today, the requirements for this program are very stringent. The buyer generally must have had experience in the type of business being purchased; in many cases the goodwill will not be included in the purchase price; the buyer must have very good credit; and the business must have an excellent track record and be able to show it with good financials. And these are just the basic requirements.

Seller financing has quite a few pluses. Here are a few:

There is a better chance that the business will sell. In fact, in many cases the business won't sell for all cash unless the seller is willing to lower the price substantially.
The seller will usually receive a much higher price if he or she is willing to finance a portion of the sale price.
Most sellers are unaware of just how much interest can increase the total consideration paid for the business. A seller-financed note, for example, at eight percent interest paid over nine years actually doubles the amount carried.
With interest rates paid by banks and other savings institutions and the stock market the lowest they've been in years, seller financing may make a lot of sense economically.
Seller financing may also have some positive tax consequences.
And, finally, financing the sale tells the buyer that a seller has sufficient confidence in the business that it will or can pay for itself.

Creative financing can also be very helpful. For example, a toy store generally does 40 percent or more of its business in October, November and December. Make the payments higher in those months and lower in the summer when business is not usually as good. Or, if the business is in a summer resort, make the payments much higher in those months and lower in the middle of winter. Seller financing has been the mainstay for successful business sales.