Business Brokers BC Blog

Seller Financing – Advantages

Saturday, June 12th, 2010

Seller financing has always been and continues to be an important part of any business sale transaction.  A large percentage of Buyers do not have the capital necessary to make all cash offers, or are unable to borrow the money, or are reluctant to use up all of their capital (they want to have some in reserve to cover any cash flow shortages).  Banks also take time to make any lending decisions and often want the Buyer to put up their homes as collateral (something some Buyers are reluctant to do).  Buyers also feel that a business should pay for itself and are wary of a Seller who wants all cash.

If you look at statistics, it’s apparent that Sellers receive a much higher purchase price if they accept terms. Studies show that, on average, a Seller who sells for all cash receives only 70 percent of the asking price.  Sellers who are willing to accept terms receive, on average, 86 percent of the asking price – a 16 percent difference.  On a business listed for $250,000, the Seller who is willing to accept terms will receive about $40,000 more than the Seller who is asking all cash. This is a compelling reason for a Seller to accept terms.

For the Seller the primary reason that they are reluctant to offer financing terms is their fear that the buyer will be unsuccessful.  If he or she should stop making payments, the Seller will be forced to either take back the business or forfeit the balance of the note.  Another reason is that Sellers feel that they can do more with cash than with the receipt of monthly payments and that selling their business may be the only time that they can get a “lump payment of cash.”  However, we as Business Brokers try to alleviate these fears by pointing out some of the ways sellers can protect their investment, and some of the advantages of carrying the balance of the purchase price.  Equally important to this equation is how the deal itself is structured.

What are the advantages to the Seller of financing the sale?

  • The chances of the business actually selling are much greater with seller financing.
  • The seller will achieve a much higher price for the business with seller financing.
  • A good interest rate can increase their actual selling price substantially.
  • With interest rates currently fairly low, sellers can get a much higher rate from a buyer than they can get from any financial institution.
  • Sellers may also discover that, in many cases, the tax consequences of accepting terms are a lot more advantageous than those on an all-cash sale.
  • Financing the sale tells the buyer that the seller has enough confidence that the business will, or can, pay for itself.
  • The seller may be able to borrow some cash using the note and security agreement as collateral.
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