When contemplating the sale
of a business, an important option to consider is seller financing.
Many potential buyers don't have the necessary capital or lender resources
to pay cash. Even if they do, they are often reluctant to put such
a hefty sum of cash into what, for them, is a new and untried venture.
Why the hesitation?
The typical buyer feels that, if the business is really all that
it's "advertised" to be, it should pay for itself. Buyers
often interpret the seller's insistence on all cash as a lack of
confidence--in the business, in the buyer's chances to succeed,
The buyer's interpretation has some basis in fact.
The primary reason sellers shy away from offering terms is their
fear that the buyer will be unsuccessful. If the buyer should cease
payments--for any reason--the seller would be forced either to take
back the business or forfeit the balance of the note.
The seller who operates under the influence of
this fear should take a hard look at the upside of seller financing.
Statistics show that sellers receive a significantly higher purchase
price if they decide to accept terms.
On average, a seller who sells
for all cash receives 69.9 percent of the asking price. This adds
up to a 15.8 percent difference on a business listed for $150,000, meaning that
the seller who is willing to accept terms will receive approximately $24,000
more than the seller who is asking for all cash. The seller who asks for cash
receives, on average, a purchase price of 36 percent of annual sales; compared
to the seller accepting terms, who receives an average of 42 percent of annual
Even with these compelling reasons to accept terms,
sellers may still be reluctant. Selling a business can be perceived
as a once-in-a-lifetime opportunity to hit the cash jackpot. Therefore,
it is important to note that seller financing has advantages that,
in many instances, far outweigh the immediate satisfaction of cash-in-hand.
- Seller financing greatly increases the chances that the business
- The seller offering terms will command a much higher price.
- The interest on a seller-financed deal will add significantly
to the actual selling price. (For example, a seller carry-back
note at eight percent carried over nine years will double the
amount carried. Over a nine-year period, $100,000 at eight percent
will result in the seller receiving $200,000.)
- With interest rates currently the lowest in years, sellers can
get a much higher rate from a buyer than they can get from any
The tax consequences of accepting terms can be much more advantageous
than those of an all-cash sale.
- Financing the sale helps assure the success of both the sale
and the business, since the buyer will perceive the offer of terms
as a vote of confidence.
Obviously, there are no guarantees that the buyer will be sucessful
in operating the business. However, it is well to note that, in
most transactions, buyers are putting a substantial amount of personal
cash on the line--in many cases, their entire capital. Although
this investment doesn't insure success, it does mean that the buyer
will work hard to support such a commitment.
There are many ways to structure the seller-financed sale that make
sense for both buyer and seller. Creative financing is an area where
your business broker professional can be of help. He or she can
recommend a variety of payment plans that, in many cases, can mean
the difference between a successful transaction and one that is
not. Serious sellers owe it to themselves to consider financing
the sale. By lending a helping hand to sellers, they will, in most
cases, be helping themselves as well.