Why Seller Financing Still Matters
It's not hard to see signs that the economy is improving--the Dow recently closed above 15,000, employment is stable and small business owners across the nation are once again investing in targeted growth initiatives.
We're seeing signs of economic improvement in the business-for-sale marketplace, too. Owners who delayed selling their companies during the recession are now entering the marketplace and proceeding with their plans to exit their businesses.
However, don't let the long-awaited economic upturn temp you to take shortcuts when selling your business. In some instances, sellers are now entering the marketplace with the misconception that they no longer need to offer seller financing to attract qualified buyers--a mistake that is driving the best buyers away from otherwise appealing business opportunities.
Why Seller Financing Is Still Important
In a down economy, seller financing is a strategy that sellers use to help cash-strapped buyers purchase small businesses. During the recession, when acquisition financing was in short supply, many business buyers needed the seller to take a 20 percent or more of the sale price in the form of a loan that the buyer agreed to pay back over time, with interest. Even if the buyer was able to get third-party funding, the lender typically required that the seller have skin in the game, too, in the form of seller financing.
Given recent signs of a stronger economy, it's now tempting for business sellers to think that they don't need to offer seller financing to buyers. However, the improvement we're seeing in both the business-for-sale marketplace and the economy in general doesn't negate the benefits of seller financing or eliminate the need for many sellers to offer some form of financing. Here's why ...
There's no doubt that commercial lending markets are gradually loosening. But lending requirements are still restrictive and prohibit many qualified buyers from securing the capital they need to acquire businesses. Seller financing is often the only option when banks are not at the table or are only willing to lend a small amount. Interestingly, banks are willing to loan more money to buyers when seller financing is involved. They treat seller financing as equivalent to buyer equity, which improves the ratio of bank debt to owner's equity and makes the transaction more attractive to lenders.
Lack of Collateral
It's common for small business borrowers to provide personal collateral for commercial loans, often in the form of a mortgage on their personal residences. Although housing prices are improving, they haven't fully recovered from the hit they took during the downturn, which limits buyers' ability to borrow against their homes. Seller financing can fill the gap and allow a transaction to get done that might otherwise not have made it past the finish line.
Higher Sale Price
Seller-financed deals nearly always command higher sale prices than cash deals. In part, that's because more buyers are able to make an offer, and having multiple bidders drives up the price. Another driver of higher pricing in seller-financed deals is that the seller is taking on some risk; that higher level of risk requires a higher return on the sale. By offering seller financing to buyers, the gap between the asking price and the actual sale price is typically smaller than it would be if seller financing wasn't provided.
Faster Sale Time
Seller financing reduces the amount of time it takes to sell your business and finalize the deal. It takes time for buyers to secure commercial financing and once they do, commercial loan requirements prolong the time to closing. If you are eager to sell your business soon, seller financing is a great way to accelerate the process.
At BizBuySell.com, we routinely see sellers offer financing in exchange for other concessions. It's all part of the negotiation process. For example, if you want to remain involved with your business or have a say in how the buyer will operate the company post-sale, seller financing can be a powerful bargaining chip.
With tax rates having recently risen, the more you can spread out the receipt of the proceeds from your sale into the future, the better. With seller financing, you are taxed on a smaller amount when you sell the business while the remaining tax burden is paid out over time--potentially in retirement years when tax rates for many sellers will be lower. Be sure to consult with a qualified tax adviser on the specifics of your transaction.
Of course, the strongest argument for seller financing is that if you don't offer seller financing and buyers can't get financing, you may end up without a buyer. Most will agree that helping to finance a sale is far better than no sale at all!
Seller financing will never be right for every business owner. For example, if you need the entire proceeds of the sale upfront and are willing to accept a lower ultimate sale price and/or longer sale period, then seller financing may not be necessary. But if you can afford to finance a portion of the sale price, it's likely that you will be able to maximize your sale price and achieve other important sale goals--regardless of how the economy is faring.