Offering the option of seller financing helps sell your business.
Selling a business presents numerous challenges. The number one reason most transactions do not close after a buyer and seller have “negotiated” a deal is that the landlord cannot come to terms with the seller and/or buyer. The second reason is that finance is not available.
A Seller prefers cash.
For obvious reasons, sellers prefer all cash. Tom West of Business Brokerage Press is a writer and analyst on small business transactions. According to West, research shows that sellers receive a significantly higher purchase price if they decide to accept terms or carry a seller’s note. Furthermore, on average, a seller who sells for all cash receives 69.9 percent of the asking price, whereas if the seller is willing to carry some of the financing, the selling price will increase by 15.8%. For example, if a business lists for sale for $150,000, and the seller is willing to carry some financing, they will receive approximately $24,000 more than the seller who is asking for all cash.
Applying the above, but instead of looking at the listing price, West found that a seller who asks for cash receives, on average, a purchase price of 36 percent of annual sales. This compares to the seller accepting terms, who receives an average of 42 percent of annual sales.
To close this gap, seller financing can be the only solution that offers more upside for the seller than they may initially consider. This is especially true if the economy is difficult, financing is hard to obtain, the business is not attractive, or in some other situation.
Benefits of seller financing.
Apart from the benefit of the seller receiving interest on the note, the primary upside for the seller is that tax is not paid on the money they receive from the buyer until it’s received. An accountant can break the tax position down in more detail, but if the seller can delay paying taxes, that’s a big plus.
The number two upside is that the seller can sell the note if there is an urgent need to obtain more cash. The note is purchased for a discount on its face value, with the discount varying depending on several factors, including the length of time before the note is paid in full, the buyer’s creditworthiness, and the buyer’s payment history on the note. If the note is being cashed two years after it was issued and the buyer has been making note payments on time, this will help the seller get more for the note, as the buyer has demonstrated a capacity to pay it.
Additional reasons.
In addition to the above, the seller should consider some financing for the following reasons:
- The chances of the business selling increase significantly.
- It will attract a higher offer from the buyer than a cash offer because the buyer can repay the note using the business’s earnings.
- It provides confidence to the buyer that the seller is willing to “stand behind” the financial earnings of the business and its future success, including the buyer’s investment.
- Interest rates on deposits with the bank are at their lowest rate in many years. Reasonable interest rates on a seller-financed deal can significantly add to the actual selling price.
- With interest rates currently at their lowest in years, sellers can obtain a significantly higher rate from a buyer than they can from any financial institution.
- There are tax benefits to the seller when accepting terms rather than those of an all-cash sale.
Buyer Motivation.
With all the positives, one of the greatest concerns for the seller is whether the buyer will be successful. However, if the buyer puts down a substantial deposit, the seller sees that the buyer has a strong motivation to succeed and will commit to the ongoing success of the business.
It is often difficult if not impossible for a buyer and seller to negotiate seller financing on their own. This is not only because of the emotions in the deal from each party but also due to the many ways to structure a seller-financed sale.
Your business broker, with their professional skills, can be of help by recommending a variety of payment plans that, in many cases, can mean the difference between a successful transaction and one that is not. Seller financing is a beneficial tool in a transaction, as it creates a win-win scenario for both buyer and seller, which ultimately leads to the successful conclusion of any transaction.
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 at (Toll-Free): (844) 414-9700