Does Seller financing make sense when selling your business in California?
Is there an upside to Seller financing, and does it make sense?
Selling a business in California presents numerous challenges, especially when considering Seller financing options. The number one reason most transactions don’t 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 number two reason is that financing is not available.
For obvious reasons, a Seller prefers cash.
According to an analysis by Tom West of Business Brokerage Press, statistics indicate that sellers receive a significantly higher purchase price if they accept the terms of the offer. On average, a Seller who sells for all cash receives 69.9 percent of the asking price. This adds up to a 15.8 percent difference on a business listed for $150,000. Therefore, the Seller willing to accept terms will receive approximately $24,000 more than the Seller asking for all cash. The Seller who asks for money receives, on average, a purchase price of 36 percent of annual sales. In comparison, the Seller accepting terms gets an average of 42 percent of yearly sales.
Closing a gap with Seller finance
Seller financing is the only solution to close this gap. It has more upsides for the Seller than they may initially consider.
The number one upside benefit is that tax is not paid on the money he receives from the Buyer until it’s received. An accountant can break down the tax position in more detail. 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. The discount varies according to different variables. Still, it includes the length of time before the note is paid in full, the creditworthiness of the Buyer, and the history of the Buyer’s payments on the note.
If the note is being cashed two years after it was started 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.
More reasons to offer Seller finance
In addition to the financial reasons covered above, there are other reasons for a Seller to offer Seller financing. These include:
- The chances of the business selling increase significantly.
- It will attract a higher offer from the Buyer than a cash offer. This is because the Buyer can repay the note from the business’s earnings.
- It provides confidence to the Buyer that the Seller is prepared to “stand behind” the business’s financial earnings and future success, including the Buyer’s.
- Interest rates on bank deposits are at their lowest in many years. Reasonable interest rates on a seller-financed deal will significantly increase the selling price.
- With interest rates currently at their lowest in years, sellers can get a much higher rate from a Buyer than from any financial institution.
- There are tax benefits to the Seller when accepting terms rather than those of an all-cash sale.
With all the positives, one of the Seller’s most significant concerns is whether the Buyer will succeed. However, if the Buyer puts down a substantial deposit, then the Seller sees that the Buyer is motivated to succeed. The Buyer will commit to the business’s ongoing success.
It is often difficult, if not impossible, for a Buyer and Seller to negotiate Seller finance on their own. This is not only due to the emotions of each party involved in the deal, but also because there are various ways to structure Seller finance sales.
Your business broker, with their professional skills, can help by recommending various 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 the Buyer and Seller, which inevitably leads to the successful conclusion of any transaction.
Are you thinking about selling your business? Would you like to know its value? If so, please visit my website, business valuation.
For more immediate assistance, you can email Andrew Rogerson or contact me directly at (844) 414-9700.
