When selling your small business, offering seller financing is a great way to help your business standout from others on the market and it is also a good strategy to consider that can help you close a sale.
If you plan to offer seller financing as a part of your purchase agreement, there are a number of things you need to know so that you can structure an agreement that works for both you and the buyer.
What is seller financing?
To start, let's define exactly what seller financing is. Seller financing is when the seller of a small business provides financing to the buyer for a portion of the sale price. In most cases, the seller will only offer financing for a part of the sale price and then the buyer needs to secure funding to finance the balance.
Why has seller financing become popular?
It is no secret that business purchase financing has changed since the recession. Prior to the recession lenders were handing out credit like it was candy! Lenders are being more selective about whom they give money to in an effort to avoid the pitfalls we experienced during our most recent economic meltdown. With lenders tightening up their lending criteria; buyers have had to become creative about how they fund the purchase price of a business deal. Most sellers are aware of the challenges that a buyer can face when working to obtain financing so as a result small business owners started offering seller financing to help ensure their company sells.
In addition to seller financing being attractive to buyers, it also helps buyers when they go to lenders to get financing for the remainder of the purchase price. When a seller offers financing it shows the bank or lender that they have confidence in the new owner's ability to run the company. And since the seller is willing to finance a portion of the sale price, the lender is risking a smaller amount.
Today, many business deals include some variation of seller financing. It is estimated that 60 to 90 percent of sales that closed so far in 2014 included seller financing terms. If you are considering offering seller financing, here are 3 things you need to know to make it work for you and your business.
1. The terms need to work for both parties
While offering seller financing can certainly make your company more attractive to buyers, keep in mind buyers are buying a business to make money for themselves. With that said, as you think through the details of your agreement make sure that the terms work for both you and the buyer. Some experts say that offering seller financing can actually command a higher asking price. While I have seen that be the case, I would suggest you view seller financing as a means of closing the sale, not getting a higher price and write your terms accordingly.
In most of the seller financing deals I have been a part of the owner usually finances about 60 to 70 percent of the sale price. The repayment term is usually about 5 to 7 years at a rate of 6 to 10 percent interest. Of course terms and conditions should vary based on your business but these figures are typical.
2. Make sure you protect yourself
If you decide to offer the buyer financing you are essentially functioning as a lender. Lenders take steps to ensure their money is repaid to them and you should do the same. If the buyer cannot repay your loan within the terms you agree to, you should have specific repercussions built into your purchase agreement. It is common for sellers to put into their terms that if a buyer cannot pay the loan back that the seller will regain control of the business, use the business's real estate as collateral or ask for a personal guarantee from the buyer on the loan.
3. Get an Attorney involved
Your sale terms and purchase agreement need to be put in writing by a professional attorney. Regardless of whether or not you are working with a business broker, you want to have an attorney involved in this aspect of your sale to make sure that you are covered should any part of your seller financing agreement fall apart. You also want to make sure that your purchase agreement is clear and written in language that will hold up in court should it ever come to that.
#photo#About The Author: Peter Siegel, MBA is the Founder and Administrator of BizBen.com (established over 25 years!) and is a Business Purchase Financing expert (SBA and Non-SBA financing). He consults daily with California business buyers, owner/sellers, business brokers, and agents regarding buying and selling California small businesses. Call him today regarding getting advise on finding, buying, selling, financing a business purchase/getting pre-qualified (ask about the BizBen ProBuy and ProSell Programs for business buyers and owner/sellers, and brokers).