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One of the most important steps in selling your business is its valuation. Many factors impact the business value. However, if you want to stay ahead and get accurate value, you should be mindful of your buyers’ competition in the market. This can be achieved with seller financing, which can have a significant impact to valuing your business.
What is seller financing?
Also known as “owner financing” or “seller carryback,” seller financing is a strategy used when business owners want to sell their business and, in particular, if there is a need to mitigate risk on the part of the buyer. In seller financing, sellers give a loan to the buyer to cover part of the sale price. Buyers then pay the amount back to the seller in regular installments or, occasionally, based on future events or conditions (commonly called an earnout’).
It’s an effective and reliable strategy for business owners, as it attracts more buyers who are willing to pay a higher price. It may be a requirement as part of bank financing with an SBA loan. It benefits buyers in cases where the business has a weakness that needs to be mitigated by the seller. Examples include customer concentration, rapid growth, loss of key employee(s), undeclared off-books income, threatened or actual lawsuits, and so on.
Effect of seller financing on the business valuation process
Increases the value
With seller financing, business owners get more buyers as there is reduced risk to the buyer. Also, the deal can close quickly with less negotiation. This concept makes the business more attractive, increasing its value. One of the key advantages of seller financing is competitive interest rates and flexible payment terms that buyers usually look for.
Reduces the buyer’s risk perception
When buyers are new to the market, investing a large amount in business purchases comes with significant risks. Buyers don’t feel safe, and the overall situation becomes doubtful for them. Seller financing protects buyers’ money and encourages them to invest in the business without undue concerns.
Ensures the seller has “skin in the game.”
When sellers partly finance buyers to purchase their businesses while requiring a substantial down payment from the buyer, it ensures that sellers have their skin in the game. This idiom means that sellers are highly committed to the transaction.
The involvement of sellers in the transaction ensures that they have a personal financial stake in its success and are less likely to walk away from the deal. This increases the business value as buyers feel that the risks are shared.
Bring adjustments to business valuation
Business valuation often uncovers issues in finances, customer concentration, and other aspects of the business. Sometimes, the process also reveals errors in the financial statements that require immediate changes or adjustments.
Seller financing helps mitigate adjustments in business valuation, such as modifying terms of the financing agreement or making necessary financial corrections.
Impacts the seller’s price expectations
It’s a fact that sellers expect a high return when selling their businesses. Seller financing aligns with this expectation by increasing the value of the business. By seller financing and reducing financial risks to the buyer, sellers can market their businesses at a higher price and expect to get the same.
Factors to consider before opting for seller financing
Assess the financial condition of the buyer
Buyers will repay the amount only if they are capable of the same. Therefore, you should analyze the financial condition of the buyers. Ensure that the buyers’ knowledge, skills, and experience match the business. They should have additional liquid funds for working capital. Most importantly, buyers should be capable of making a sizable down payment without borrowing from other sources.
Consider the risk management
With seller financing, your situation is riskier than buyers’ because both your business and money are in in their hands. Thus, you should consider risk management, including ensuring that buyers have sufficient collateral to cover non-payment. Additionally, confirm that the property set for collateral has adequate insurance coverage.
Closing Lines
Seller financing can play a significant role in business valuation for particular business conditions and risks. Although it carries some risk to the seller, you can enjoy its benefits in the long term. Consider opting for seller financing to increase the value of your company and attract more buyers.
For any assistance, contact Adam Noble Group and work with qualified business brokers.
NOTE: The sale of a business is confidential and discreet; PLEASE DO NOT VISIT THE BUSINESS OR SPEAK WITH ANY EMPLOYEES. We know about many businesses that are for sale but might not be advertised. Check out www.adamnoble.com for more information and consider registering your criteria as a purchaser.
ALL STATEMENTS, FIGURES, AND VALUES ARE SUBJECT TO A PROSPECTIVE PURCHASER’S DUE DILIGENCE. THE INFORMATION FURNISHED BY M&A ADVISOR ABOUT THE BUSINESS AND ITS FINANCIALS HAS BEEN PREPARED BY OR IS BASED UPON REPRESENTATIONS AND INFORMATION SUPPLIED BY THE SELLER. ADVISOR HAS MADE NO INDEPENDENT INVESTIGATION OR VERIFICATION OF SAID INFORMATION.
For information, reference Texas Renovation-Rehab Multifamily Construction Services Business for Sale Business for Sale 20456 and contact Jeff Adam, PE, MCBC, FRC, CBB at Adam Noble Group, LLC
Phone: (817) 467-2161
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During 3 decades of M&A service, Jeff Adam has successfully completed the sale of over 825 businesses and advised or completed 1,000’s of business valuations and exit plans. An entrepreneur in his own right, he has started and grown 12 companies in fields including international finance, B2B services, business valuation, construction, screen printing, Mergers & Acquisitions, engineering, and manufacturing. Jeff has donated his time as a distinguished speaker at numerous national & international conferences since 1977 covering topics such as environmental services, engineering, media, craft breweries, exit planning, business valuation, charitable giving, management, business brokerage and M&A fields.
Jeff is President of Adam Noble Group, LLC, a national M&A Advisory firm, professionally valuing, exit planning, and confidentially selling profitable businesses owned by exit-motivated business owners to qualified strategic, corporate, private equity, partners, management, and financial buyers. The team establishes rapport, builds trust, and educates business owners in the steps to meet their goals as they prepare and achieve the discreet, confidential exit of their business. The firm exclusively represents sellers of $1M-50M value enterprises and endeavors to transfer their businesses to qualified, capable acquirers who will build upon the seller’s vision, goals, culture, and history. Jeff maintains lifelong repeat and referral relationships with sellers, their acquirers, and service providers.
Adam Noble Group has multiple M&A and business broker specialties: Manufacturing, Aerospace Defense Industry, Oilfield services, Technology, Construction trades, Craft Breweries, Partnership Buyouts, Service, and Wholesale Distributors.
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