Tuesday, 27 September 2011

Why is Seller Financing so Important?

Recently, in a discussion with a business owner the subject of financing the sale of their business was a ‘hot topic’. The truth is, an improperly structured transaction can create problems for the seller years after he or she has sold the business.

Firstly, many potential buyers don't have the necessary capital or lender resources to pay cash for a business. Even if they do, they often want to leverage it into buying a larger business with greater cash flow.  When a seller demands cash, buyers interpret this insistence as a lack of confidence in the business, the buyer's chance to succeed, or both.

This interpretation has some basis in fact. The primary reason that sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease making the payments, the seller would be forced to take back the business.

The seller who operates under this fear should take a hard look at the positives associated with seller financing:
1) Seller financing increases the chances that the business will sell. Making the terms attractive and attainable increases the pool of qualified buyers.   A seller offering terms will command a much higher price. Buyers paying cash will demand a discount.

2) The interest on a seller-financed deal will add to the actual total sales price.   With interest rates currently as low as they are, sellers can get a much higher rate from a buyer than they can get from any financial institution.

3) The tax consequences of accepting terms can be advantageous when it comes to the Seller’s capital gains.

By lending a helping hand to the buyer, you can help yourself as well.
Finally, securing the services of a good business broker to help the Seller navigate through the structure of their business sale can be good preventative medicine.  Although there are no guarantees, sound guidance when it comes to down payment, debt service and buyer due diligence can go a long way to maximize your sale price and minimize the likelihood of getting the business back after it is sold. 

Do you have small business questions you would like answered about this article or others?  Please visit www.VRWindsor.com or call 519-903-7807. 
William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.


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