The Keys to Seller Financing
When you are selling your business, it’s important to be open to the possibility of seller financing. Finding the right candidate is difficult enough, but you can expand your pool of candidates considerably if you offer financing.
Not all of these candidates have access to sufficient financing through traditional lenders (banks, etc.), but that doesn’t necessarily make them bad candidates. In fact, your ideal buyer may be among them. Not only that, but according to Andrew Gazdecki, a contributor for Entrepreneur, offering seller financing may also justify a higher sales price for your business and result in tax benefits, allowing you to collect those payments over multiple years as capital gains which they wouldn’t be able to do in a straight cash purchase.
Guidant Financial, a firm that help finance small businesses, suggests that between 60% and 90% of all small business purchases involve seller financing in which those sellers allow the buyer to pay between 5% and 60% of the sale price back to them in increments with interest.
“The willingness of sellers to offer financing is usually a sign that the seller is confident their business will generate enough income to pay back the loan,” it says in a Guidant Financial blog post. “Some entrepreneurs believe if a seller isn’t willing to offer financing, it’s a sign that the business itself may be in trouble.”
That is, of course, not always the case. Offering financing on the sale of your business can come with risks, and the greater the percentage of the sale price you are financing, the greater the risk. But if done properly, it can be a beneficial arrangement for both you and the buyer.
Here are a few points to keep in mind to get the most out of that arrangement.
Collect at least 15% down on the loan
A down payment is your insurance policy as a seller. It guarantees that your buyer has a stake in the business so that he/she will continue to honour your arrangement even if the business is flagging during the ownership transition. Traditional lenders will typically require much more than 15%, which is an obvious benefit to buyers. Our friends at BizBuySell advise sellers not to finance more than 50% of the sales price of the business without a good reason (for example, selling to family).
Negotiate your interest rates and term length
These terms can vary but whatever you decide, you’re going to want to negotiate. Guidant Financial noted that term lengths typically range from five to seven years, and interest rates range from 6% to 10%. And while the purpose of seller financing is to lower the barrier to entry for buyers, as a seller, you have the same abilities as a bank to investigate a potential buyer’s credit history and deny them the loan if they fail to meet your criteria.
Take care of your own financing
This is an obvious one, but if you have responsibilities to pay down debt on the business, those obligations need to be met first. If a buyer makes their payments faithfully, you have an obligation to make yours.
Don’t do it alone
You should consult both a financial and legal professional when setting up these arrangements. Because of all the potential variations (which is part of the benefit!), you’ll need a legal document (such as a promissory note) and other input to ensure the agreement is airtight. That might involve securing collateral and insurance coverage, and determining which documents will be transferred and when (for example, the seller may not transfer the land sale document until the loan is paid). But whatever arrangement you agree to, get help crafting the terms.
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Opinions expressed here by Contributors are their own.
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