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Truthfully, most sellers don’t want to take back paper. An all-cash deal often looks like the easiest and cleanest way to get on to the next venture, much preferable to waiting for another 5 to 7 years to collect a portion of the sale price from a buyer who might conceivably default.

Along with the risks, however, there may be some significant advantages to the seller of seller-financing. In fact, sellers who are willing to offer financing to a buyer are not only more likely to sell, but they may ultimately get a far better price. It’s a  matter of minimizing risk.

Making the Sale Happen

Particularly in a tight market, business owners who offer seller financing may be more likely to sell. If your business is attracting interest but no offers, offering to finance the sale may be a better choice than reducing the price. Buyers are certainly prompted by popular business media to look for seller financing.

Advantages and Disadvantages to the Seller

Financing the sale of a business is like any other investment.  Sellers get paid for the risk they assume. Not only are sales more likely to happen, sellers who finance

  • tend to get closer to asking price
  • collect interest on the loan, which can add an additional 5 to 25 percent to the sale price, and
  • can either take back the business or sell the note in the event of default.

Of course the business may have declined in value during the buyer’s tenure and the seller may no longer want to own or operate it.  Remember, too, that if the buyer used the business’s assets to get a bank loan, sellers may find themselves in a second position behind the bank when trying to recoup the security.

Characteristics of a Good Deal

In order to make seller financing work for you, make sure that you take the following 4 steps:

  • Credential your buyer. Remember that this is someone who very likely was not able to qualify for a Small Business Administration loan, or other bank financing.  It would be reasonable to ask for a credit report and business references, at the very least.
  • Ask for a healthy down payment, considerably more than in the case of a home sale. Many recommend between one-third and two-thirds of the sale price.
  • Charge enough interest on the note. There are several schools of thought about how much is appropriate, and it depends on the amount of risk assumed. Some recommend between 8 and 10 percent. Others note that it would be difficult to justify much more than a bank rate. As with any investment, there should be a rational relationship between risk assumed and reward expected.
  • Consider staying on as a consultant. This may not be initially attractive, and it may not be the right choice in every circumstance. You presumably know how to run this business, however, and the loan gives you a continuing stake in its success.

Selling your business is a big step, and it would be foolhardy not to work closely with an attorney, a professional business appraiser and an accountant, among other professionals throughout the process.

Financing the sale adds even more layers of complexity. The contract of sale and the terms of the note should give you security that is appropriate to the risk you agree to assume. If, when viewed as a whole, the risk of investing in your buyer can be brought to an acceptable level, seller financing may be a way to maximize your price.

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