Seller Financing
Though sellers may not like it, seller financing is becoming a requirement for the sale of a business to take place. Some of the pros and cons are:
Pros:
1) Sellers generally get a 14 to 17 percent higher price on a sale when using seller financing
2) Buyers feel more comfortable that the seller has faith in the success of the business
3) Allows for a quicker close as buyers who may not be able to line up traditional financing can borrow from the seller
4) Seller financing can have better tax advantages to the seller
Cons:
1) The new buyer may not run the business as successfully as the seller, and the seller may have to take back the business or forgo the business note
2) Factors out of the control of the buyer, such as economic and natural disasters, could have a negative impact on the business, increasing risk to the seller rather than the buyer
One method that allows the sellers obtain the “pros” of selling a business without having to take the “cons” is having a buyer for the note lined up. How does it work? During the negotiations of selling the business, the seller can also seek out a buyer for the note. Once the deal with the business seller closes, or simultaneously with the business closing, the business seller can immediately sell the note or a portion of it to a note broker for cash.
The discount range on the sale of the note varies depending on various factors such as experience and credit rating of the business buyer and the maturity of the note. Discounts usually start at 15 percent and go up. However, this cost to the seller is usually offset by the increase in selling price obtained by using seller financing. In addition to the actual buyer willing to pay more for the business when seller financing is used, the market for potential buyers is larger when seller financing is available, which allows the seller to be more selective on who gets to buy his successful enterprise.
Selecting the less risk-averse buyer helps the business seller decrease the discount rate on the sell of the note. The discount rate on the sale of the note can also be enhanced for the seller after the note is “seasoned,” which generally takes at least four to six months. This allows the note broker to obtain more confidence that the business buyer is operating the business successfully and the decrease in risk is reflected in a better discount rate to the seller (i.e. note holder).
Certainly, this method is not for all sellers, but it is an option that a seller may have a need to utilize and transfers the risk to the note holder.
Feel free to contact me with your questions.
- Steve Sink
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Pros:
1) Sellers generally get a 14 to 17 percent higher price on a sale when using seller financing
2) Buyers feel more comfortable that the seller has faith in the success of the business
3) Allows for a quicker close as buyers who may not be able to line up traditional financing can borrow from the seller
4) Seller financing can have better tax advantages to the seller
Cons:
1) The new buyer may not run the business as successfully as the seller, and the seller may have to take back the business or forgo the business note
2) Factors out of the control of the buyer, such as economic and natural disasters, could have a negative impact on the business, increasing risk to the seller rather than the buyer
One method that allows the sellers obtain the “pros” of selling a business without having to take the “cons” is having a buyer for the note lined up. How does it work? During the negotiations of selling the business, the seller can also seek out a buyer for the note. Once the deal with the business seller closes, or simultaneously with the business closing, the business seller can immediately sell the note or a portion of it to a note broker for cash.
The discount range on the sale of the note varies depending on various factors such as experience and credit rating of the business buyer and the maturity of the note. Discounts usually start at 15 percent and go up. However, this cost to the seller is usually offset by the increase in selling price obtained by using seller financing. In addition to the actual buyer willing to pay more for the business when seller financing is used, the market for potential buyers is larger when seller financing is available, which allows the seller to be more selective on who gets to buy his successful enterprise.
Selecting the less risk-averse buyer helps the business seller decrease the discount rate on the sell of the note. The discount rate on the sale of the note can also be enhanced for the seller after the note is “seasoned,” which generally takes at least four to six months. This allows the note broker to obtain more confidence that the business buyer is operating the business successfully and the decrease in risk is reflected in a better discount rate to the seller (i.e. note holder).
Certainly, this method is not for all sellers, but it is an option that a seller may have a need to utilize and transfers the risk to the note holder.
Feel free to contact me with your questions.
- Steve Sink
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