ROLE & IMPORTANCE OF SELLER FINANCING IN SELLING A BUSINESS
Almost without exception, all business sellers would prefer to get 100% of their selling price in cash at closing – and for some very good reasons.
Most sellers have heard horror stories about other sellers who sold their business for little or no cash down, and carried a seller’s note for almost the entire purchase price, and lived to regret it.
Nonetheless, I generally coach my selling clients that they should be prepared to take back a least a small seller’s note – perhaps for only 10% of the selling price – if the deal justifies it and the buyer is trustworthy and creditworthy.
Often when the seller insists on getting 100% cash at closing, the buyer, his banker and other advisors, begin to suspect that perhaps the seller knows something is about to go wrong with the business, and is eager to get as far away as possible. This suspicion obviously has a chilling effect on the negotiations.
In contrast, when the seller is willing to carry even a small seller’s note, say 10% of the purchase price, the bank is more comfortable, and the buyer and his advisors are more confident that they are not buying a distressed business, and also that the seller will be willing to assist with advice and counsel beyond the typical four week training period, should it be necessary.
One study focused on the impact zero seller financing has on selling price, and concluded that businesses which sold with zero seller financing sold for as much as 40% and 60% less than comparable businesses.
Other studies have shown that 70% of all business sales included some element of seller financing. This percentage no doubt increases during economic downturns and at other times due to the tightening of the credit markets.
This is particularly true of smaller businesses. One study concluded that in over half of all businesses sold, the seller financed over 50% of the selling price. Some businesses which are particularly difficult to “bank,” such as construction contractors, may be almost unsalable without significant seller financing.
Another benefit of taking even a small seller’s note and treating the transaction as an installment sale for tax purposes is that it may reduce – or at least defer – the seller’s total tax burden.
If you would like to learn more about the ratio of seller financing visit our website at Transworld Business Advisors
As ever, if you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free, confidential, consultation with us, have them contact me.
Michael Shea P.A.
Board Certified Intermediary
321-287-0349