Consider Financing the Sale of Your Business

There are many ways to finance the purchase of a business. Add to this that not many sales are handled on an all-cash basis. Consider the following major ways that a small business can be financed, keeping in mind that a professional business broker can answer most of your questions when it comes to financing the sale of a business.

Buyer Financing – Buyers may have the cash available to purchase the business. Some may elect to use the equity in their home, or other real estate. Others may have other assets that they can sell or borrow against. However, the number of all cash transactions on businesses priced over $100,000 is minimal. So much down and so much a month is part of the American tradition. And buyers like to know that the business can support them and pay itself off from the profits.
Banks – Banks may lend against the buyer’s assets. They may also lend against the assets of the business, assuming they are sufficient to support the loan. The business will also have to make sense to the bank, regardless of the asset value. In fairness to the banking system, many of the figures supplied by sellers have very little relationship to the actual earning power of the business. If the business is not successful, the bank would be left with only the hard assets of the business and no way, except an auction or “fire-sale” to liquidate them. Banks are not in business to liquidate the Furniture, Fixtures and Equipment (FF&E) of businesses.
Venture capital firms – These firms do not, as a practice, lend to small or even mid-size businesses unless tremendous growth is expected. They also expect a piece of the business. An equity interest in the local pizza shop is not what the typical venture capital firm is really looking for.
SBA loans – These have become more popular. Now, there us competition among lenders of these loans. Many banks offer them, but the large non-bank companies seem to have the upper hand both in service and acceptance rates. However, less than 5 percent of businesses that are sold are financed by the SBA, either directly or on an SBA guaranteed basis.
Other sources – This category consists of family, friends, credit cards, leasing companies, etc. Interestingly enough, credit cards are the biggest source of small business financing.
Seller financing – This is, by far, the largest source of financing available for the purchase of a business. Industry experts say that at least 90 percent of small businesses sell with, or perhaps because of, the seller financing a good portion of the sale price. This portion is usually 50 percent or more, financed over 5 to 10 years.

Advantages of Seller Financing

Many buyers feel that the business they buy should be able to pay for itself. They are wary of sellers who demand all cash. Is the seller saying that the business can’t support any debt or is he or she saying, “the business isn’t any good and I want my cash out of it now, just in case?” This is just as true for the seller who wants the carry-back note fully collateralized by the buyer. First the buyer has probably used most of his or her assets to assemble the down payment and the additional funds necessary to go into business. Most buyers are reluctant to use what little assets they may have left to collaterize the seller’s note. The buyer will ask: what is the seller not telling me and why wouldn’t the business provide sufficient collateral? Again, don’t forget that a business broker professional is the best source of information on financing the sale of a business. He or she is familiar with all of the various methods and is knowledgeable about all of them.

Here are some other reasons why Seller Financing is important:

The chances of the business actually selling are usually greater with seller financing. The rule of thumb is that, if the price of the business is $100,000 or less, all-cash is probably okay. If the price is more, the chances of it selling are much greater if a down payment of about 40 percent is offered by the seller.
The seller usually receives a higher price for the business with seller financing.
Many sellers are unaware of how much the interest can increase the selling price. For example, a seller carry-back note at 8 percent carried over 9 years will actually double the amount carried. $100,000 at 8 percent over a 9-year period results in the seller receiving $200,000
Interest rates are currently fairly low, so sellers may be able to get a higher rate from a buyer than they can get from a financial institution.
Seller may also discover that, in some cases, the tax consequences of accepting terms are a lot more advantageous than those for an all-cash sale.
The seller may be able to borrow some cash using the note and security agreement as collateral. It may not be as easy as borrowing against real estate notes, but it’s still better than nothing.
Financing the sale tells the buyer that the seller has enough confidence that the business will, or can, pay for itself.
Seller financing presents very little, if any, problems. The business doesn’t have to pass the rigors of a lending institution, nor does the buyer. Seller financing is hassle-free for both sides. It may also be a lower-cost loan than one from a lending or financial institution. Buyers may also be able to command a lower interest from a seller than from other sources.

Why You Should Consider Financing the Sale of Your Business