Selling A Small Business Requires Seller Financing

Alan Dinnie
Alan Dinnie
Selling A Small Business Requires Seller Financing

There is simply no getting around the fact that anyone looking to sell their business will have a greater chance for success if they are able to finance part of the transaction.

Further, the vast majority of business sales include this component and especially in tight credit markets where buyers do not have the requisite collateral to obtain third-party loans. By the way,

banks lending money for business purchases by individuals has never been a major component of business sales no matter how good the economy may have been.

Sure, every seller wants a cash buyer. It’s good to dream, but the chances of that happening are slim. As such, for anyone considering the sale of their business they have to realize what a potential deal will look like and what they (the seller) will want in a buyer in order to feel comfortable financing them.

Considerations to the amount, term and rate must be given. These terms vary greatly and can range anywhere from one to five years. Also, as a percentage of the total price, what is a realistic portion to finance? Clearly, the buyer wants the greatest leverage possible plus, from their perspective, seller financing is testimony by the seller of their strong belief in the business.

So not only is seller financing a key component to getting a deal closed, it is, on its own, a great selling tool.

That is why for example that businesses listed on the market with seller financing are usually even highlighted on the various business for sale websites.

They simply generate more activity because (a) it is an attractive deal term and (b) it makes it possible for a larger prospective buyer pool to purchase. At the very least, even if you are dead set against financing, be open-minded and list it for sale with “Seller financing negotiable”. Failing to do so will dramatically decrease the buyer pool which is a foolish thing to do.

In the nine businesses I have sold, I have provided to eight of the buyers and always got paid. There were a few instances where the new owner ran into problems so I helped them out temporarily by deferring payments for a month or two and in those cases also helped out with some planning with them which assisted in getting them back on track.

I realize that some of you may be thinking that you are not going to sell your business if you have to finance the sale and I understand that position. Unfortunately, the reality is that if you want to sell it, you will have to participate in the deal.

Even if a buyer is lucky enough to arrange third-party financing, many lenders today still require the seller to hold paper in the deal, so you may not have any choice.

On the former point of financing, with the current credit markets, sellers will have to readjust their thinking.

If buyers don’t have the assets to fund a purchase and if lenders are not lending, then sellers have to take up the slack. If not, the business for sale market will continue to trend downward.

I have long held the opinion that sellers need to assume part of the risk in a business sale.

Further, as many businesses experience a recent decline, the only way they can validate what they have represented to the buyer, and demonstrate their confidence in the business, the industry, and the customers, is to participate in the financing of the deal.

There’s no choice.

There are simply not many people walking around with ample liquid assets to buy a business.

As their net worth’s have declined, mainly due to their real estate holdings, fewer of them will qualify for SBA. Most cannot tap in to their home equity to fund down payments or to secure any third party financing. When you add the fact that a declining business may not meet lender criteria either, then buyers and sellers are getting hit at both ends.

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