Seller financing is very common, and sometimes it’s the only way to put a deal together. Most business owners would love to receive an all-cash offer for their business. However, the reality of the situation is entirely different.
Sellers need to be ready to entertain the idea that they may need to handle some aspect of financing if they want to sell their business. Buyers begin to worry if a seller is not willing to finance the sale. They may even see this as a “red flag”. Many buyers feel that if a business is a solid investment, then the business will be profitable. Therefore, repaying the seller should be no problem.
If a seller isn’t willing to help with financing, buyers may worry that there is a “hidden” problem with the business. They may think that the seller is trying to unload a failing business. Sellers need to keep this important aspect of buyer psychology in mind when addressing whether or not they are willing to finance.
Another aspect of seller financing is collateral. Buyer psychology plays a major role in this too. To secure the loan on their business, sellers may want to have some form of outside collateral. Although this seems perfectly understandable to the seller, buyers can have a nervous response to this issue. The buyer’s thought here is that if the business was healthy and thriving, then there should be no need for collateral.
Usually, buyers are maxed out when buying a business. They have allocated their available funds to the down payment of the business. Sellers need to see the situation from the buyer’s perspective. A collateral requirement could mean that if the business fails, the buyer could be left with nothing.
Understanding the complex interaction between buyers and sellers is no easy feat. It requires a careful balance of skills, ranging from understanding finance to psychology. Working with an experienced business broker can help buyers and sellers connect and find workable agreements so deals can get closed.