Should You Help Finance the Purchase of Your Business?
Seller financing is one way to help assure that the business will sell. Offering to help finance the purchase of your business can make your business much more attractive to potential buyers. You will save them the hassle of obtaining financing on their own, plus you will interest buyers who may not be able to get financing through traditional channels.
Should you and the buyer elect to take this route the terms of the financing contract will be based on your need to sell and on how much financing the buyer requires. This will depend in part on how much the buyer has for a down payment.
From the perspective of the buyer, securing financing through the seller is easier and gives the buyer greater flexibility than working with a traditional lender. For one thing, the interest rate will generally be lower than a bank loan. The payment schedule can also be more flexible. Since the buyer and the seller are both working toward the same end result, it is in the interest of both parties to create a suitable financing and payment plan.
The advantage of such financing for you, as the seller, is that you can usually get a higher price for the business than if the buyer is working solely with other financing sources, such as a bank. Outside lenders may not want to take on the risk, and may limit the amount of the loan.
Of course as the seller and the lender, you are assuming risk too. Your due diligence should include checking the credit rating of the buyer, as well as a thorough inquiry into the buyer’s background.
As a seller, you should know why the buyer is purchasing the business, and you need to be confident in the buyer’s ability to make regular payments. In most seller-financed situations, the business itself is the collateral. This is only worthwhile if the business is doing well. If not, you may need additional collateral.
Your specific situation and your buyer’s circumstances will both influence how the deal is structured. For example, if you are selling because you need money immediately, you won’t be able to finance the sale. But if you are in a position to receive payment over time and are comfortable with the buyer’s credit history, then such financing can be advantageous.
It’s not uncommon for the seller to finance 40 to 50 percent of the purchase price of a business. In addition to the financing, any number of terms can be factored into such an agreement. For example, the contract might specify that you stay on as a consultant or in some similar capacity, receiving a salary through the transitional period and for several months or even a year or more after the deal has been completed.
As a seller, you should know why the buyer is purchasing the business, and you need to be confident in the buyer’s ability to make regular payments. In most seller-financed situations, the business itself is the collateral. This is only worthwhile if the business is doing well. If not, you may need additional collateral.
Your specific situation and your buyer’s circumstances will both influence how the deal is structured. For example, if you are selling because you need money immediately, you won’t be able to finance the sale. But if you are in a position to receive payment over time and are comfortable with the buyer’s credit history, then such financing can be advantageous.