This article is one of a series that offers insight and guidance into the process of buying selling or valuing a business. This particular article specifically addresses business acquisition and business acquisition loans made by the seller. Whether you want to buy, sell, or appraise the valuation of a going-concern business, or identify financing, these articles provide specific guidance and references to help you accomplish your goal.
Seller Financing: It Makes Dollars and Sense
by Tom West
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
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, or both.
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 instead of having the buyer seek a commercial business acquisition loan. 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 sales.
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 will sell.
The seller offering terms will command a much
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 financial institution.
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 successful 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.
About the Author
||Mr. Tom West is the editor of The Business Broker, a monthly newsletter for the business brokerage field. He has written the The Business Reference and Pricing Guide and The Resource Handbook for Business Brokers. He is a founder, past president, and former executive director of the International Business Brokers Association (IBBA). He is a frequent lecturer and seminar leader on all aspects of buying, selling, or appraising a business. Mr. West is probably the most knowledgeable individual in the country today concerning the issues of buying or selling small to mid-sized businesses.