Advantages of Seller Financing
BY Austin Dale Group, Austin, Texas – Adviser to technology companies
Business owners who want to sell their business are often told by M&A intermediaries and business brokers that they will have to consider financing the sale themselves. Many owners would like to receive all cash, but many also understand that there is very little outside financing available from banks or other sources for small businesses. In many cases, the only source left is the seller of the business.
Buyers usually feel that businesses should be able to pay for themselves. They are wary of sellers who demand all cash. The buyer may feel that the seller is really saying that the business can’t support any debt or that the business isn’t any good and the seller wants his or her cash out of it now. Buyers are also wary of the seller who wants the carry-back note fully collateralized by the buyer. Many buyers may have used most of their assets to assemble the down payment and working capital. The buyer will ask, “What is the seller not telling me and/or why wouldn’t the business itself provide sufficient collateral?”
There are real and practical benefits for the seller to offer seller financing. Here are some reasons why a seller might want to consider financing the sale of his or her business:
- More likely to sell: There is a greater chance that the business will sell with seller financing. In fact, in many cases, the business won’t sell for cash unless the owner is willing to lower the price substantially. The smaller the businesses, the more likely this is the case.
- Higher price: The seller will usually receive a higher price for the business by financing a portion of the sale price.
- Interest adds up: Most sellers are unaware of how much the interest on the sale increases their actual selling price. For example, a seller carry-back note at 7.5% carried over ten years will increase the amount received by the seller by over 42%. That is, you would receive $1,424,421 if you financed $1 million at 7.5% over a ten year period.
- Higher rate of interest: With interest rates currently the lowest in years, sellers usually get a higher rate from a buyer than they would get from any financial institution.
- Tax benefits: Sellers may also discover that, in many cases, the tax consequences of financing the sale themselves may be more advantageous than those for an all-cash sale. Sellers will want to talk to their tax advisors to best understand the tax consequences of various scenarios.
- Buyer assurance: Financing the sale tells the buyer that the seller has enough confidence that the business will, or can, pay for itself.
There are also a number of advantages of seller financing for the buyer. Just a few include:
- Lower interest
- Longer terms
- No fees
- Seller stays involved
- Less paperwork
Easier to negotiate