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Seller Financing - Should I Consider It When Selling My Business

Q  First, what is Seller Financing in a business sale?

A  It is a loan by the seller to the buyer (sometimes referred to as a vendor-take back) in order to complete a business transaction.  It is common in the sale of small to medium-sized businesses.  It is essentially a promissory note from the buyer to the seller for a portion of the business value over a period of time.

Q  Why would a seller even consider loaning funds to the buyer when selling a business?

A  Simple, to get the deal done.  When considering the sale of a business, an important option to contemplate is seller financing. Some potential buyers don't have the necessary funds or lender resources to pay cash. Even if they do, they are often reluctant to put such a large sum of cash into what, for them, is a new and unproven venture.

Q  Why does the buyer hesitate when buying a company? 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.

A  The buyer is correct, in part, in their thinking. The primary reason sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should stop making payments--for any reason--the seller would be forced either to take back the business or forfeit the balance of the note.

Q  What are the benefits of providing seller financing?

A  1.  Seller financing increases the number of potential buyers and increases the chances that the business will sell.

     2Seller financing increases the likely purchase price (assuming the buyer pays off the note!)

     3Seller financing give the seller a stake in the success of the new owner, which is likely to help with transition issues.

     4Offering Seller financing is perceived as a vote of confidence by the buyer.  It indicates that the seller has confidence that the business will succeed under new ownership.

     5With 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. Once a business sale transaction closes, the seller’s thoughts are, “how do I invest the cash from selling my business?”

     6The tax consequences of accepting terms can be much more advantageous than those of an all-cash sale.

Even with these compelling reasons to offer financing, 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 gratification of cash-in-hand.

Obviously, there are no guarantees that the buyer will be successful in operating the business. However, in many cases when someone buys a business, 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 significant commitment.

Regelle Partners Inc. 2012