What You Need to Know about Seller Financing

Nov 30, 2015

Business sales are rarely completed without some type of financing. Seller financing is involved in up to 90 percent of small business sales and more than half of mid-size sales. In most cases, the buyer’s ability to make the payments will depend on the future success of the business, therefore the buyer may benefit by having the previous owner serve as a consultant to the business.

Corporate downsizing and shrinking salaries have made owning a business more tempting of a proposition than ever.  But as more and more prospective business owners embark on the process of buying a business, they share a common concern – business purchase financing.   The credit crunch has made traditional borrowing nearly impossible, which can make business ownership impossible for some and challenging for many people.

Before you start a search for “businesses for sale” or consult an FSBO directory, be sure to learn a little bit about alternative means of financing.  Most business owners, especially those who are selling their business through a Businesses FSBO directory, will be willing to discuss seller financing that does not involve working with a lending institution.  This doesn’t mean that they won’t check your credit and references; but it may be your best option for financing the acquisition.  In fact, for businesses that are priced in the $100,000 – $150,000 range, seller financing is the chief source of funding.

A recent study shows that businesses financed by the owner had an average down payment of 37 percent. The research shows a seller would receive a considerably higher price by using seller financing, rather than demanding an all-cash transaction. That does not even include the additional interest received by the seller on the carry-back. The business owner must choose between an all-cash transaction, with a likely much lower price or choosing to finance the sale to potentially receive a significantly higher price plus interest, but with much less cash involved.

How easy it is for you to work hand-in-hand with the seller will depend on tax considerations and their own needs for cash. In some instances, the seller is forced to finance the sale if they want to prevent the deal from falling through.  When you start searching on the Business for Sale by Owner directories, you will find many sellers who actually prefer to do the financing themselves.  This not only increases their chances of selling the business quickly, but it helps ensure they get the best possible price.

Seller financing terms are often more agreeable and more flexible than those that come from a lending institution because their interest rates are usually lower than the bank’s rates with a much longer amortization period.  Like a conventional loan, you will still need to make scheduled payments, but seller financing can be a bit more confusing.

Seller financing can provide a tax break for the business owner if they qualify for installment sale treatment. For the buyer, seller financing can be a godsend because you’ll generally have more relaxed qualification standards and more lenient terms than a bank would have.

All in all, when a seller offers financing it makes their company stand out in a “businesses for sale” listing.  Even when a buyer prefers to borrow from an outside lender, some will actually refuse to participate unless a large chunk of the debt will be financed by the seller.