It is important to understand how a buyer finances the purchase of a business. The majority of business sales include some form of seller financing. Typically, seller financing is when the seller provides a loan to cover part of the purchase price. The rest of the purchase price is covered by the buyer’s down payment, typically 50%+/- or SBA finance, if the business qualifies for a SBA loan. Summed up another way, the seller is essentially acting as a bank for the buyer in some form.
When sellers offer financing, it often helps them achieve a higher final sale price. Sellers who are not open to some form of seller financing will likely limit their possibilities of selling their business or need to discount the price to attract an all cash buyer, which are difficult to find.
Performing Due Diligence
When a seller opts for seller financing, it is necessary to do much of the work that a bank would usually perform, for example, checking a potential buyer’s resume, credit report, financial statements and other key financial information.
Usually contracts have terms and conditions that allow for the seller to take back a business if financing fails. The key is to make sure the buyer has skin in the game with a significant down payment and the background to be successful. If this is in place, the probability of having an issue is dramatically reduced.
Providing Benefits for Both Parties
It should also be noted that seller financing is of considerable interest to buyers. Sellers looking to attract as much attention to their business as possible will want to consider this route. Offering this type of financing sends a very clear message. When a business owner is open to seller financing, he or she is stating that he or she has great confidence that the business will generate both short term and long term revenue. That level of confidence speaks volumes to buyers about the health of the business and will increase your chances of selling the business.
What Due Terms Typically Look Like?
In terms of the length of seller financing, 5 to 7 years is typical and the interest rate can range from 5 -7%. The issue of how much a seller is expected to finance is another item that draws considerable attention. While there are no steadfast rules as to what percentage seller’s typically finance, it is common for sellers to finance about 50% +/- of the total purchase price. This creates an even playing field and balance the risk for both seller and buyer.
Finally, providing seller financing with either a significant down payment or as part of SBA finance is how a large percentage of businesses are sold. The key is to set it up properly to avoid problems. Opting to work with an experienced Business Broker is absolutely essential to protect all parties involved.
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