Seller finance benefits selling a business
What are the benefits of seller finance to sell a business?
Over the years, the sale of many businesses includes a component of seller finance. Since August 2008, a component of seller finance for privately held companies has become much more the norm as banks and third party lenders have been reluctant to lend. It’s become important not only because the banks have reduced their amount of lending but also because the banks are now reluctant to loan as much of the purchase price. For example, in previous years, if the buyer brought a down payment of 20 per cent the bank was willing to lend the remaining 80 per cent.
So the good old days are now behind us with the banks now preferring the buyer to bring a down payment of 20 per cent, the seller to carry a note of 20 per cent and the banks will then fund 60 per cent as long as the seller moves into second position.
This change of dynamics is making it difficult for sellers to decide if they really want to sell. Many sellers are reluctant to carry a note because they are worried the buyer will not make that payment or the conditions of the bank or SBA loan may mean the seller only starts to receive loan payments 3 or 4 years after the transaction closes escrow.
There are downsides to seller finance but there are many upsides. Let’s have a look at a few of them.
Benfits of Seller Finance
One of the main benefits to the seller agreeing to carry seller finance is that it delays the payment of taxes. Selling a business at the close of escrow triggers a taxable event. However, the tax is only due and payable when the seller receives the money. For example, if the seller carries a note on $100,000 of the purchase price and the note is repayable at $20,000 per year for five years then the tax due is not payable until the seller receives the money each year. And the basis of the rate of tax is on the applicable tax rate in that year; not the rate the seller pays when the business closes escrow.
A further benefit to the seller from seller finance is that the note provides a steady stream of income in the form of an annuity. For many sellers this is attractive as they may be moving to their next venture and are yet to create a new steady stream of income.
Another benefit of seller finance is that it encourages the buyer that the seller believes in the business and with all the seller disclosures, the buyer has the ability to run the business effectively. This morale boost can be important to buyers as they work through their decision making process.
In addition to the above, seller finance will generally pay interest on the seller note at a much higher rate that the seller can get by investing the money in a CD or some other form of interest bearing account.
When you bring all the above ideas together there is a compelling reason for the seller to fully understand Seller finance and how it would benefit the sale of a business. In some cases, a seller may choose to get a sizable down payment from a qualified buyer and then carry a note for the rest of the purchase price. Of course, if a seller was comfortable with this situation it would enable the deal to close escrow much quicker as the buyer does not need to apply to a third party lender for finance which can often be a 6 to 12 week process; if the loan request is approved. At the moment, knowing a third party lender will approve a loan request is one of the biggest drawbacks affecting the closing of many business transactions.
Are you thinking about selling your business? Would you like to know the value of your business? If you would like more information please visit my website Business valuation.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.