Why Consider Seller Financing

One of the first issues I address with my prospective seller clients is that of seller financing.  This is one of those topics that fall under the category of, “it’s my job to tell  you the truth… even if you don’t like it.”  Many  are surprised to learn that seller financing is actually quite common and often necessary.  Moreover, there is a lot of upside to seller financing.  Not only for the buyer but the seller, as well.

What is Seller Financing?

Seller financing means that the seller serves as a sort of bank for the buyer.  Seller financing occurs when the seller provides a loan to cover some part of the purchase price. It’s common for the rest of the purchase price to be covered by a combination of the buyer’s down payment and additional financing sources. 

Benefits of This Approach

While many sellers do not relish the prospect, seller financing can benefit the Seller. There are two key benefits which I always raise.  First, offering any amount of seller financing stimulates buyer interest. It proves that you believe in the business and its ability to thrive in the future enough to bet on it  yourself.    Even if you only offer 10% of the total purchase price in seller financing, you are still conveying that message of confidence to buyers and lenders who will take the greatest stake in the risk of future payback.  In fact, I  work with a lot of lenders who are suspicious of any deal that does NOT include at least some seller financing.  Plus, it demonstrates to buyers that you are not going to simply cut and run after the sale.  Instead, you will be invested in their success by more than wishing them well.

The second reason I strongly encourage seller financing is because it typically affords a higher sale price.  The reason is simple; more buyer interest and more lender interest equal more buyer competition in the market.  Additionally, financing a portion of the sale price over time may provide tax advantages to the seller.  Just like your financial advisor is always telling you, it’s not always about what you make, it’s about what you are actually able to keep.

Due Diligence is Essential

Sellers who choose to offer seller financing will still have to perform the necessary due diligence. If you’re working with a bank, in conjunction with seller financing, the bank will check a potential buyer’s financial statements as well as their credit reports, but you should still  do the same.  

If there is no bank involved, checking their credit and background is a must.  You should also consider the size of the buyer’s downpayment, their past experience and your recourse should they default.  

Safeguards to Utilize

There are a variety of safeguards that sellers can use to help protect themselves when offering seller financing.  Here we can be invaluable guides in this regard. Typically, you will have lien against the assets of the business to help secure your interest.  Contracts may allow for the seller to take back the business within a 30-to-60-day window if financing fails. Businesses centered on inventory may be sold with a contract clause that  requires the new owners to maintain a predetermined level of inventory during the payment period.

Seller financing can benefit both buyers and sellers in a number of ways. Sellers  usually discover that they receive a good deal of attention from buyers and realize a higher sale price. Buyers enjoy greater flexibility in terms of financing and have a very clear indicator of seller confidence in the business. While the idea may not be greeted by seller clients with enthusiasm initially, it is often appreciated in the long-run.   

Copyright: Business Brokers & Consultants, Inc


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