When a business owner decides to sell their business, one of the key steps they can take is to offer seller financing.
The recent experiences of two local business owners illustrate the benefits of offering terms. Both have cash flows of approximately $300,000 and are asking in the $900,000 range.
The first business was a retailer asking for a $300,000 down payment and the second is a printing business who wants all cash. The first business sold in a couple of months and the second hasn’t had a serious buyer look at it in months. A main reason for this disparity in activity is that when a seller insists on all cash, buyers look at this as a lack of confidence in the business, the buyer’s chance to succeed, or both.
This interpretation has some basis in fact. The primary reason that sellers shy away from offering terms is their fear that the buyer will be unsuccessful. A seller who feels this way needs to consider the positives associated with seller financing.
Since many potential buyers don’t have the necessary capital or lender resources to pay cash, this step opens the door to a wide range of buyers.
A seller offering terms will command a higher price. Buyers paying cash will demand a discount.
Another benefit is that the interest on a seller-financed deal is in addition to the actual selling price. For example, the retailer I spoke of earlier who sold his business for $900,000 with a $300,000 down payment will net almost $1,200,000 during the term of the deal.
With current interest rates as low as they are, sellers can get a much higher interest rate from a buyer than they would receive from a financial institution.
Also, there are tax benefits because instead of being taxed in the year the sale occurs, in an installment contract, the seller’s capital gains are taxed during the life of the note.
Obviously, there are no guarantees that the buyer will be successful in operating the business. However, there are a number of things a seller can do to protect themselves.
One of the key protections is getting the buyer to invest a significant amount of their own money in the down payment.
Few incentives inspire the buyer to achieve success greater than the risk of losing a lot of money.
In other words, it is one thing to walk away from $30,000 down payment and a completely different thing to walk away from $300,000.