Does Seller Financing Make Sense

Does seller financing make sense? It is an important option to consider when contemplating the sale of a business. Many buyers don’t have lender resources or the necessary capital to pay cash. Even if a buyer has cash, they may be reluctant to put a hefty amount into a new and untried venture.

Why do buyers hesitate? A typical buyer feels that the business should pay for itself if it really is all that it’s advertised to be. Buyers often interpret the seller’s insistence on all cash as a lack of confidence. This is a lack of confidence in the business, in the buyer’s chances to succeed, or both.

There is some basis in fact with the buyer’s interpretation. A primary reason sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer ceases payments, the seller is forced to either take back the business or forfeit the balance of the note.

Sellers operating under this fear should take a look at the upside of seller financing. According to statistics, sellers receive a significantly higher purchase price if they decide to accept terms. On average, a seller who sells for all cash receives approximately 70 percent of the asking price.

Seller financing has advantages that, in many instances, far outweigh the immediate satisfaction of cash-in-hand.

Advantages of Seller Financing
  • Seller financing increases the chances that the business will sell.
  • The seller offering terms will command a much higher price.
  • With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from any financial institution.
  • The interest on a seller-financed deal will add significantly to the actual selling price.
  • The tax consequences of accepting terms can be much more advantageous than those of an all-cash sale.
  • Financing the sale helps assure the success of both the sale and the business, since the buyer will perceive the offer of terms a vote of confidence.

 

There are no guarantees that the buyer will be successful in operating the business. However, in most transactions, buyers are putting a substantial amount of personal cash on the line. Although this investment doesn’t insure success, it does mean that the buyer will work hard to support such a commitment.

There are many ways to structure the seller-financed sale that makes sense for both buyer and seller. Creative financing is an area where EBIT can be of help. We can recommend a variety of payment plans that can mean the difference between a successful transaction and one that is not. Serious sellers owe it to themselves to consider financing the sale.

REDPIXEL PL/BigStock.com

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