Offering seller financing can increase the likelihood of selling your business. Many sellers see it as a desperation measure to unload their company, but it can offer several benefits. Financing the sale of your business can help you to find more buyers or negotiate a better deal. It can also help you sell the business faster. Seller financing can also be structured to provide the seller with a steady stream of income after the sale instead of a single lump sum payment. However, you must assess the circumstances and the risks of offering seller financing. Failure to do so could place you in a predicament, such as having to sue a buyer for defaulting on the loan.
Financial Benefits of Seller Financing
In a cash deal, or one that is completely financed by a 3rd party, the seller can walk away from the sale of a business with money in the bank, free from any further obligation to the business. When you offer seller financing, you are committing to remain tied to the business for a pre-determined amount of time after the sale. If financing the sale of your business goes right, you could receive a higher asking price and get the benefit of earning interest income. You can continue make money from the business, even though you no longer own it. The buyer is supposed to pay back the principal and interest on the loan, which is easy to do if the business succeeds. However, if it fails, the seller could lose interest income, and incur additional expenses trying to collect the debt.
It is important to look at seller financing as a business investment. All investments carry risks, which can be minimized by making calculated decisions. Make sure you are comfortable enough in the buyer’s ability to run the business to offer them financing. Assess their creditworthiness, and consider accepting collateral if necessary. Some buyers might be seeking a seller-financed deal because they cannot obtain traditional lending. This could be due to an inadequate down payment or other borrowing issues. Follow your instincts when it comes to choosing a worthy buyer. If they are a good investment risk, you could reap substantial rewards for self-financing.
By offering to finance the sale of your company, you will be able to demand a higher asking price. Partially financed sales typically fetch a price 15% higher than a cash deal on a comparable business. Another major benefit of seller financing is that you have the potential to increase the principal value of your business with future interest payments. Financed sales yield a higher rate of return than other investments. Make sure you charge an appropriate amount of interest for the market and level of risk you are taking on, and stay firm in your offer.
You can minimize the risk of seller financing by requiring a substantial down payment. By financing no more than 20-50% of the sale price, you can shift the risk more in the buyer’s direction. Remember that as the amount you finance increases, so does your risk. Try not to finance more than 50% of the sale unless you are selling to a family member or trusted acquaintance.
Assessing the Risks of Financing the Deal
If you decide to offer seller financing, get someone with professional experience in business sales, such as a business broker to help you structure the deal. Even cash or traditionally financed sales involve countless intricacies and potential obstacles. Seller financed deals add another layer of complication. The sale of the business can be structured many different ways and an experienced broker can help you to avoid costly mistakes, as well as give you leverage in negotiations. Additionally, they can help you to filter out unqualified buyers, a service that will come in handy since seller financing attracts more of them. Seek legal advice as well to make sure you are protected in any potential deal.
Any time you decide to sell a business, you may receive pressure from buyers to give in to their requests or negotiations. You might find yourself eager to sell due to retirement plans, financial reasons or to relieve yourself from burnout. Sometimes buyers are desperate because they have failed to get financing elsewhere and may carry additional risk. They might try to put pressure on you to negotiate further. Step back and assess any situation before moving forward. By offering to finance the deal, you will receive more buyer inquiries, so you can afford to be selective and wait for the right buyer to come along. Don’t feel obligated to work with someone who makes you uncomfortable.
There are many investors and buyers interested in purchasing existing, proven businesses in Southwest Florida. If you are considering listing your business for sale, contact Corporate Investment Business Brokers in Fort Myers. We can help you to figure out whether seller financing is best for your situation. Our goal is to help you maximize your profit and sell your business on your terms. Contact us to get a free, no-obligation consultation and business valuation. You may discover that your business is worth much more than you expected.
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