4 Reasons Why A Business Owner Should Consider Seller Financing

Do you remember as a small child turning off your light switch and running to jump in your bed before the monster under your bed grabbed your foot? Maybe you had a fear of the deep end of the pool growing up before learning that the deep end actually offers some added benefits to your swimming enjoyment.

Some business owners approach seller financing with some unjustified fears while others have grown to appreciate the added benefits such as growing their wealth.

Business Owners Should Consider Seller Financing As A Way To Increase Their Profits

As a small child, my dad repeatedly mentioned to me that the nicest building that one will ever enter during their life are casinos and banks. It is no secret that banks make their money by taking calculated risks at lending money.

Give example $1,000,000 x 10 years @ 9.5% =

If a bank or the SBA were to lend money to a business buyer they would ask for a certain amount down and they would vet the borrower thoroughly. In the same way, a business owner would do the same with the help of their CPA and attorney. While fear might prevent one business owner from lending, the other in the same scenario might see an opportunity.

Business Owners Should Consider Seller Financing As A Way To Reduce Capital Gains

Minimizing Capital Gains Exposure - I think that it is pretty safe to say that most business owners want to pay as little in taxes as possible. Receiving payment over time limits your tax exposure by moving and reducing the payments on your business over time. Being paid a lump sum during a year when you have made a good salary might bump you into a higher tax bracket.

Being advised by your CPA on how your tax exposure could be reduced is always a great strategy and one that could save you a lot of money. The percentage of seller financing that a business seller might be willing to offer might be influenced greatly by one's CPA.

Business Owners Should Consider Seller Financing As A Way To Increase Security

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If a business owner is paid a lump sum for their business, where do they invest their money? What is the highest rate of return that they can expect in the most secure investment?

A business owner could decide to lend 10%, 20%, or even 100% of the price of their business as their investment strategy. Currently, the SBA interest rate for business purchases is 10.25%. If a business owner decided to lend his money at a rate of 9%, where else might he or she expect that kind of return?

With the help of an attorney and CPA a potential buyer could be vetted much like a bank would vet them and a business structure could be drawn up by your attorney to limit risks.

If a business owner is only offering partial seller financing of like 20%, then they can rest assured that the SBA is going to take the lender through a very in-depth vetting process.

Business Owners Should Consider Seller Financing Because the SBA May Require It

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With many of the deals that we are currently completing with SBA lending, the SBA is requiring some portion of seller financing. We are mostly seeing the percentage of seller financing being asked for between 10—20% of the total deal (Price for the business and working capital).

At some point, business owners might be faced with this consideration if they truly want to sell their business. Is it worth it to sell your business if the SBA requires 10-20% of the lending to come from the seller? Every business owner needs to make informed decisions rather than fear-based decisions when this moment comes.

Our advice is always twofold for anyone considering seller financing as an option:

Consult with your CPA regarding the financial benefits and risks associated with seller financing.
Consult with your attorney regarding how your business acquisition might best be structured legally which provides you with greater security while limiting risks.