As the leading business brokerage firm in Colorado, we have lenders coming to us almost daily. They have money to lend and they encourage us to send deals their way. It's great that lenders want to finance deals, but many of the deals we do are not large enough to be of interest to the highly active lenders in the business acquisition space. If you need to borrow $500,000 or $1,000,000 - we can readily find lenders who want to participate. But what if your deal is smaller?
At Transworld, our bread & butter transaction has always been akin to the so called "mainstreet" businesses: the mom and pop shop or owner/operator businesses. The majority of the deals we complete in the Denver office max out at $500,000 in sale price. How do we get those deals done? Seller Financing!
When the seller is willing to carry a note for a portion of the purchase price, good things happen:
- The seller receives a down payment at closing, but then payments on the note will continue over subsequent months - usually 24 to 60 months. This gives the seller a recurring monthly income stream for the life of the note. In addition, he will realize a certain level of interest income over and above the purchase price. For example, a five-year loan for $50,000 at 6% will put an extra $8,000 of interest into the seller's pocket.
- The seller gets to defer tax liability for the payments received on the note. In many cases, an installment sale such as this can significantly reduce the bite of taxes for the seller because he does not receive all of the sale proceeds in a single tax year. Therefore, the seller avoids getting boosted into a higher marginal tax bracket because of a one-time liquidity event (See your accountant or tax advisor for details about your particular situation).
- Quite often, a seller can command a higher price for the business because they are willing to carry a note from the buyer. Seller Financing brings more potential buyers into play, creating competition for acquiring the business.
The buyer also benefits from Seller Financing in the following ways:
- The cash outlay to acquire the business is reduced, resulting in a higher immediate return on that initial cash investment. (This is often referred to as the "cash-on-cash" return.)
- Interest paid on the note is deductible by the business.
- And perhaps most important, the seller has an incentive to do whatever he can to smooth the transition for the new owner because the seller continues to have a financial interest in the success of the business. Even in larger deals that qualify for SBA financing, the SBA requires that the seller carry a note for a small portion of the sale price. This is done to assure that the seller continues to have some "skin in the game" after the deal closes.
Seller Financing is a great tool for getting deals done - especially smaller deals! It greatly expands the pool of potential buyers because it lowers the amount of cash required to purchase a business. Seller Financing makes life easier for everyone involved.
At Transworld Business Advisors of Denver, we have closed an incredible number of deals that include Seller Financing. Talk with us today to see how it could help you, whether you are a buyer or seller.
Ross Haymes is a Business Broker at Transworld. He draws on his decades of experience in corporate finance and entrepreneurship to guide buyers and sellers toward their goals. During his 20-year career with NYSE-listed Burlington Industries, Ross served as an economist before becoming Investor Relations Director. Upon retirement, Ross realized his own dream of becoming a small business owner. In his role at Transworld, he works directly with business owners to orchestrate, step-by-step, the buying, selling and growth of their companies.