When I first mention offering seller financing, many business owners who are listing their business for sale are reluctant to consider the idea; they brush it aside, and say no immediately, without understanding the benefits to them. The business owners who take the time to learn about what it is and how it can bring them a quicker sale and bonus cash are generally in a much better position in the end. With seller financing, the seller will hold a note on a portion of the purchase price of the business. Seller financing is sometimes also referred to as seller carryback, seller carry, or owner financing. In a recent survey conducted by BizBuySell, 74% of business brokers, and 58% of business owners, reported that they believe seller financing to be either essential or important to closing small business acquisitions in today’s market.
Benefits For Sellers
Offering seller financing makes the business much more likely to sell. In fact, it is estimated that businesses that offer seller financing are 4 times as likely to sell than similar listings that don’t advertise owner financing. In addition to selling faster, sellers generally receive 11% more for their business. Based on an average multiple of 2.31 for businesses with at Least 50% seller financing, versus 1.84 for all cash transactions (Source: Toby Tatum’s Book “Transaction Patterns”). Furthermore, the interest earned by seller financing can provide significant proceeds to the seller. Just for example, interest over 9 years at 8% equals the principal. Also, receiving installment payments may provide significant tax advantages for the seller. Sellers will of course need to check with their CPA for financial advice on tax matters.
Benefits For Buyers
Businesses for sale who offer seller financing increase their chance of selling dramatically. By offering seller financing, it shows to potential buyers that the business owner believes in their business and they are confident that the performance of the business will be able to pay back the loan. This instills buyer confidence in the business, and also opens up many more possible buyers who might not have the entire asking price available in cash. Buyers also prefer seller financing to traditional financing, because no banks are involved, resulting in no bank fees for borrowing.
What Does Seller Financing Look Like?
Typical down payments required by sellers are large. 50% down is the most commonly requested amount by sellers, but it is completely up to the seller as to what they would accept. In fact, we see 20-30% down payments happen frequently. The term length of the loan is usually very short. 3-7 years is what we see most often. Normally there is a balloon payment at the end of this short term, but monthly payments can be amortized over a longer period of time, to decrease the monthly payment amount. Interest rates are negotiable, but usually higher than a bank loan. However, there are no large closing costs involved or bank fees. We typically see 7-9% these days. The tangible assets are used as the security for the loan. If the buyer defaults, then the seller keeps the buyer’s down payment, in addition to receiving the business and its assets back. Typically, the closing attorney will be able to draw up the promissory note for the parties to sign at closing.
If you have questions about seller financing, we would be happy to help answer them for you. Please contact us today!