What Is Seller Financing?
When selling a small business, one of the most important things you need to consider is where to find your prospective clients, and how you can attract them to buy your business. Seller financing is one of the things you can offer to attract a wider scope of prospective buyers. There may be a lot of buyers who will be interested in your business and they have the skills to run and manage it properly, but lack of financing prevents them from buying it. You will surely sell your business faster for the price you want if you try to understand buyers’ motivation in purchasing your business, and if you are willing to accommodate the buyers’ inquiries.
What Is Business Seller Financing?
At some point in owning a business, you may admit that you just suddenly want to sell your business for X amount. You may have arrived at this estimated price by using a combination of valuation methods. These include analyzing the sale price of related businesses for sale in your location and other areas, determining the corporate assets’ value, and factoring potential growth of revenue. Whether or not the buyer agrees to your asking price also relies on a number of factors, but the most important of all is business financing. Not all aspiring entrepreneurs have enough cash on hand to buy a small business. Most of them have money for the down payment and they plan to pay for the balance via loan transactions. Credit unions and banks are the ones to turn to for business loans, but due to current condition of the economy, business and consumer credit markets have become strict and tight on providing loans. With this, aspiring business owners turn to business seller financing, where the owner of the business for sale acts as the lender.
Why Offer Business Financing?
The following are some of the reasons why you ought to consider seller-based financing when you sell a business:
The interested buyer intends to meet your asking price but is short on available cash to pay the amount in full.
The interested buyer has excellent credit and a solid knowledge of the industry. However, he is unable to get financing due to current economic conditions.
You wish to lessen your tax liability by receiving the profits of the sale in installments instead of a lump sum.
You want to retain some control over the company during the transition process to ensure its ongoing success.
Seller Financing: How Does It Work?
Being the owner of a small business for sale, you may want to check the credit status of every potential buyer of your business. The information you need to examine are net worth, credit history (commercial and personal), as well as the experience the buyer has in your industry. Surely, you want to be certain that the buyer will run the company successfully so he or she can pay you on your loan. Some business sellers ask for a higher down payment compared to banks and other credit unions because the risks are significantly higher. This process attracts buyers since you are willing to invest time and money for their success. Once you and the buyer have agreed on the sale price, interest rate, and loan period, you can offer 7 to 10 years payback duration.
There are different ways to set payments. Some have varied tax consequences on the seller so be sure to consult a tax attorney before completing the payment paperwork. A straight-line payment allows the same amount to be paid each month until the entire loan is settled. It is also quite rare to find provisions that penalize prospective buyers for paying off the loan early. Any interest paid by the seller is offset by quickly gaining the use of the entire loan amount. Another payment method is based on a performance-based schedule. With this, payments go up at times of higher than average net income, and decline when sales go down.