by Dave Driscoll
The definition of a good deal is when both parties in a transaction benefit.
When a seller will consider financing a portion of the purchase price paid by the buyer, it’s a good deal for both that can secure the buyer’s ability to buy.
Seller financing increases the probability of the sale of the business. In every transition, the deal structure is critical to successfully selling a business. Sellers that require an all-cash purchase have a much smaller pool of buyers and therefore a higher probability of not selling the business. Frequently this results in taking the business off the market after having wasted time and burned valuable credibility. If the seller attempts to remarket the business for sale, chances are he/she will receive less value if the business does eventually sell.
Seller financing usually allows the buyer to offer more for the business than he/she could without seller assistance. Instead of reducing your price to attract buyer prospects, offer to increase the amount that you will finance. Long term, you will actually receive more value for the business beyond the purchase price because, like lender financing, interest is paid on the outstanding debt balance in seller financing.
Also, lenders’ confidence increases when a seller maintains an interest in the business’s future performance. The Small Business Administration (SBA) is one of the largest loan guarantee providers for lenders to small businesses. To qualify for a loan, the SBA requires equity contributions (down payments) from all borrowers. Down payment requirements vary, but 25% deal equity is typical. The equity can come in many forms, including cash, investment accounts and real estate equity.
In seller financing, the seller agrees to commit a small portion of the purchase price as a contribution to the buyer’s down payment, thereby helping secure financing to buy the business.
Using the SBA example of a 25% down payment to qualify for a loan, let’s see how seller financing can be the difference in making a deal.
• Business selling price: $1,250,000
• SBA Required 25% Down Payment: $312,500
• Loan Amount: $937,500
Let’s say the buyer can provide $200,000 in cash to the deal. The $200,000 represents 16% of the purchase price, a shortfall of 9%, or $112,500 from the required $312,500.
To make the deal happen, the seller could finance the $112,500 balance the buyer needs. Consider seller financing as the seller deferring a portion of the total purchase price into the future while receiving interest on the value extended as payment for assuming the risk.
Keep in mind that the seller is still receiving 91% of the business purchase price at the closing table and will receive the balance through payments of loan principal plus interest in the future.
If the seller were to require repayment of the note over five years at 7% interest, the seller would receive an additional $21,157.80 in interest over the term on top of the return of the principal.
Finding a buyer for your business is hard work – once a qualified prospect(s) is located, structuring the deal to successfully sell your business is an important strategy. Qualified buyers with real interest in buying your business should not be dealt with cavalierly; as a seller, you don’t know if or when another may come around.
Dave Driscoll is president of Metro Business Advisors, a mergers and acquisitions business broker, business valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.