Seller Financing - Should I
Consider It When Selling My Business
First, what is Seller Financing in 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.
Why would a seller even consider loaning funds to the
buyer when selling a business?
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.
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.
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
are the benefits of providing seller financing?
1. Seller financing increases the number of potential
buyers and increases the chances that the business will sell.
Seller financing increases the likely purchase price
(assuming the buyer pays off the note!)
Seller financing give the seller a stake in the success of
the new owner, which is likely to help with transition issues.
Offering 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.
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. Once a business sale transaction closes, the seller’s thoughts
are, “how do I invest the cash from selling my business?”
The 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
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