Voices|Buzz Harris: Make sale more attractive with seller financing
July 3, 2017
"If your boss is stupid, remember, you wouldn't have a job if he was smarter." — Albert Grant
When business owners decide to sell their business, one of the most important decisions is to offer "seller financing."
The reason is simple: Many potential buyers do not have the necessary capital or lender resources to pay cash. Even if they do, they often want to leverage it into buying a larger business with greater cash flow.
Consider the experiences of the owners of local businesses with similar cash flows of approximately $500,000, both asking in the $1.2 million range.
The first business was a small manufacturer asking $400,000 dollars as a down payment and the second was a retailer wanting all cash. The first business sold in weeks and the second hasn't had a serious buyer look at it in months. Why?
Buyers will interpret the seller's insistence on all cash as a lack of confidence in the business, the buyer's chance to succeed, or both.
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This interpretation has some basis in fact. The primary reason that sellers shy away from offering terms is their fear the buyer will be unsuccessful. If the buyer should cease making payments, the buyer will be forced to take back the business.
The seller who operates under the influence of this fear should take a hard look at the positives associated with seller financing.
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.
The interest on the seller-financed deal will add to the actual selling price. For example the small manufacturer I wrote about earlier, who sold his business for $1.1 million with a $400,000 down payment will net more than $1.4 million over the term of the deal.
With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from most financial institutions.
The tax consequences of accepting terms can be advantageous. Instead of being taxed in the year that the sale occurs, in an installment contract, the seller's capital gains is taxed over the life of the note.
Financing the sale helps assure the success of the sale because the buyer will perceive the offer of terms as a vote of confidence.
Obviously, there are no guarantees that the buyer will be successful in operating the business. However, sellers can help protect themselves by getting the buyer to invest a significant amount of their own money in the down payment. It is a lot harder to walk away from $150,000 down payment than $15,000.
Sellers owe it to themselves to consider financing the sale. By lending a helping hand to the seller, it will be helping themselves as well.
Buzz Harris is a Licensed Business Broker with The Liberty Group of Nevada. Contact him at BHarris@TheLibertyGroupofNevada.com or 775-825-3948.