Almost 90% of business owners have never sold a business before. So if you are beginning your research on how to sell your business, and haven't got a clue where to start, you are not alone. One of the many terms thrown around in discussions of a business acquisition or sale is seller financing. A term that almost immediately solicits a negative reaction from most sellers, it is not one that should be feared, but should be learned and understood as a tool to help sell your business.
The majority of businesses that sell today include some percentage of owner financing. With a rejection rate of about 80%, the SBA application process is often not an option for many businesses and buyers. Also, businesses that advertise seller financing along with their sale generate significantly more inquiries and a 15% higher sale price (estimated by Bizbuysell.com). There are many benefits - and risks - to seller financing and it is important that both the buyer and seller feel comfortable in the transaction.
Why Seller Financing?
Seller financing is a loan provided by the current owner of the business to the new owner of the business. Buyers negotiate seller financing for a number of reasons:
- They cannot afford the business at the full asking price
- The business transaction will not qualify for a bank loan
- There is a level of uncertainty that the business will continue to be successful without the previous owner
An owner's willingness to finance a portion of the sale often gives that business an edge over the competition, by removing some of this uncertainty in the buyer's mind.
How is the Seller Protected?
It is important for a seller financed transaction to be handled by professionals who can offer advice and construct documents that protect both the buyer and seller's interests. Typically, a promissory note is drawn up that illustrates the details of the agreement. This includes what recourse the seller has if a buyer defaults on the note. In the sale of a small business, the most likely scenario is that the seller would have the right to take the business back. Additional recourse options are using the assets of the business as collateral?or through a personal guarantee from the buyer. Utilizing a professional advisor, the seller can negotiate any of these terms or a combination.
It is also recommended that while the buyer is completing due diligence on the business, the seller does the same on the buyer. Seller financing, in effect, is an investment in the business and the new owner. At a minimum, it is recommended that a seller request credit records and references. It is important that the seller understands the buyer's background, business and financial qualifications, and motivation for purchasing the business.
How Long is the Note? How Much Interest Does the Seller Receive?
The terms of the note are constructed in order to give the buyer adequate time to repay the note. Payments must be in an amount that the buyer can afford from the business income while continuing to run the business at an optimal level. The last thing either party wants is for the loan terms to constrict the buyer and eventually put them out of business. For this reason, the term length of seller financing varies depending on factors including the size of the loan, revenue of the business, capital investment of the buyer. The interest rate charged on a seller financing note is often in line with current banking rates.
Transworld Business Advisors of Denver is a team of Denver business brokers that helps visionary entrepreneurs buy a business, sell a business, or grow a business through franchising. If you have questions regarding seller financing or how to sell your business in Denver, you can reach us at (720) 259-5099.