The Case for Seller Financing

Posted by: Today's Tip Contributor on April 30, 2010

Financing a business purchase can be a difficult task for potential buyers. If you’re planning to sell your business, offering seller financing will certainly help make your business more attractive to potential buyers.

Our firm recently sold a business whose owner was willing to finance 50% of the total transaction value. This was a great business with long-standing client relationships and solid future prospects. The seller’s willingness to finance a buyer really worked to the seller’s advantage. Our firm was able to attract a large pool of buyers that resulted in more than nine offers in just 30 days. Because there were so many good buyers, the seller had tremendous negotiating leverage, which allowed us to secure a deal that was above the asking price, and the seller had to carry only 20% in the form of a seller note.

Here are three of the top reasons you should consider offering seller financing for your business:

1. It attracts more buyers. Sellers who are willing to finance a portion of their business will attract many more buyers than the sellers looking to cash out. Buyers are very leery—and their advisers even more so—of any business owner who is looking to walk away with their entire selling price at the closing table.

2. It often results in higher selling price. Simple supply and demand dynamics really come into play when you price your business right and offer seller financing. The more buyers (demand) and the fewer businesses with seller financing (supply), the more likely you are to negotiate a solid deal. The rule of thumb is the more cash a buyer puts into a deal, the lower the price. (Versus the more seller financing that is offered, the higher the price.)

3. The seller gets higher interest and lower taxes. Obviously, when you offer seller financing, the key terms are collateral, amortization, and interest rate. In today’s market, sellers are receiving interest rates on seller notes that range anywhere from 5% to as much as 9%. In many cases, the interest earned on these types of transactions can be substantial and add tremendous value to the overall deal. In addition, by delaying when you receive the proceeds of the sale, this could decrease your tax liability.

Domenic Rinaldi
President and Managing Partner
Chicagoland Sunbelt
Chicago

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