The Dos and Don'ts of Seller Financing

2misi.com

In today's tight business for sale marketplace, an owner's willingness to finance the sale gives him an edge over the competition. To stay on track, sellers need to follow some obvious - and some not so obvious - dos and don'ts.

There's nothing more frustrating than a listed business that attracts a lot of attention, but no buyers who are willing to seal the deal. Most of the time, the business isn't the problem. In fact, a business that generates significant attention in the marketplace is usually a good candidate for a sale. Instead, the issue is most often the buyers' inability to secure financing at the owner's selling price. That leaves owners with two options: Either lower the selling price or work with the buyer to overcome sale barriers.

Assess the Risk

A cash sale is an essentially risk free transaction for the seller. Once the deal is done, the seller can comfortably walk away from the business with money in the bank. In an owner financed transaction, the seller continues to be tied to the business long after the sale is complete. If the business succeeds, the new owner pays back the principal with interest and everyone is happy. But if the new owner is unable to make the business profitable, the seller could suffer the loss of interest income and incur additional costs to collect the debt.

The bottom line is that an owner financed sale needs to be evaluated as a business investment. Like any other investment, there is a certain amount of risk inherent in the decision. If you are comfortable enough to invest in the new owner, then it could be beneficial to finance the sale yourself. But if you aren't confident the buyer can make the business a success, offering financing as an enticement to close the deal is the worst decision you can make.

Leverage the Benefits

If the buyer is, in fact, a good investment risk, the seller stands to reap substantial benefits from self financing. Too many sellers view financing as a desperate measure to unload the business when they should be viewing it as a resource for enhancing the benefits of the sale.

Right out of the gate, your willingness to hold paper increases the final selling price of the business. Partially financed sales typically result in a price that is more than 15 percent higher than their cash sale counterparts. That means you can leverage your willingness to finance as a bargaining tool during negotiations.

Advertise Your Willingness to Finance

Sometimes sellers are hesitant to advertise a financing option because they aren't totally sold on the idea and are only willing to offer financing if they get backed into a corner during the negotiation process.

If you aren't comfortable with the idea of financing, then you shouldn't consider it as an option at all, not even during negotiation. But if you are comfortable with financing part of the sale, you should include that information as a selling point in your marketing efforts.

One of the most productive avenues for advertising a seller financed company is online. Listings containing information about owner financing yield a noticeably higher volume of hits than those that don't. 

 

DON'T Do It Yourself

A loan between a seller and a buyer is subject to limitless structures and variations, many of which require the input of professionals in order to secure airtight collateral, coherent loan terms and adequate insurance coverage. Before you agree to financing, obtain legal and financial advice from a professional you trust.

DON'T Be Pressured

There's a good chance that potential buyers will try to push for a seller financed deal. This is particularly true for buyers that are unable to secure financing from traditional lending sources due to an inadequate down payment or other borrowing obstacles.

No matter how anxious you are to sell the business, caving into buyer pressure for the sole purpose of closing the deal is a big mistake. When a buyer pushes too hard for financing, take a step back and conduct a simple reality check. If you aren't completely comfortable with financing the buyer's purchase, walk away and wait for a better buyer candidate to emerge.

 

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