Seller Financing in a Small Business Sale
Why Should the Seller of a Small Business Consider Financing the Deal?
One of the best ways to finance the acquisition of a business for a buyer is through the seller. The seller’s willingness to provide financing will be influenced by the buyer’s qualifications and by his or her own requirements such as tax considerations as well as cash needs.
Many sellers finance the business because by doing so not only increases the chances for a successful sale but, according to industry statistics, can also result in up to a 15% higher price than if no seller financing is offered. Moreover, seller financing can provide tax breaks if certain criteria are met. Consult a tax attorney or CPA to make sure the loan is structured to minimize tax liabilities and maximize tax breaks.
For the buyer, seller financing can be a godsend because of more relaxed qualification standards and more lenient terms than a bank would have. The terms offered by sellers are usually more flexible and more agreeable to the buyer than those from a third-party lender. Sellers will typically finance 30 to 50 percent or more of the selling price, with an interest rate below current bank rates and with a far longer amortization. The terms will usually have scheduled payments similar to conventional loans.
Most sellers are unaware of how much the interest on the sale increases their actual selling price. For example, a seller carry-back note at eight percent carried over nine years will actually double the amount carried. $100,000 at eight percent over a nine year period results in the seller receiving $200,000.
Seller financing adds an additional benefit to the buyer by making the business more attractive and viable to other lenders. In fact, sometimes outside lenders will refuse to participate unless a large chunk of seller financing is already in place.
So, why should the seller consider financing the deal? Because, properly done and fulfilled over the term of the loan, it is a win-win for both sides and gets the deal done more smoothly and quickly.