6 Reasons Why Seller Financing Can Help Sell Your Business

Brilliant Businesses_Why_you_should_consider_vendor_financing

Still waiting for that elusive cash buyer?

If you’re trying to sell your business and you’re waiting for a cash buyer to come along with a nice big lump sum, statistics indicate you might be waiting for quite some time….if not, forever.

In fact, one of the main reasons over 80% of businesses don’t sell (yes, you read that right!) is because sellers are waiting for all cash sales.

Unfortunately, not only are cash deals as rare as the proverbial hen’s teeth, but cash buyers often expect a substantial reduction in the sale price of your business simply for the fact that they are paying cash and reducing your risk.

Does it really make sense to sell for less than your business is worth just for the sake of a lump sum?

So what are the other options for your potential buyers?

Getting a bank loan to buy a business sounds pretty straightforward. But although there are many banks and financial institutions that offer small business loans the criteria is getting tighter.

Also, most small business loans are secured against the assets of the business which are normally only valued at a fraction of the asking price. Banks are reluctant to loan against ‘goodwill’ and this is another key reason why third-party financed deals represent only about five percent of all business sale transactions.

Unsecured loans are also available but because the criteria is even tighter, these loans are extremely rare and at best very limited.

So while your potential buyers are sitting around wait for their great aunt to fall of her perch or their crowdfunding campaign to take momentum, there’s actually an easier way to secure the sale of your business.

6 Reasons Why Offering Seller Financing Can Help Sell Your Business

Whether you call it seller financing, vendor financing, or owner financing, it’s actually the same thing…a loan provided by the seller of a business to the purchaser.

And although this might sound counterintuitive at first, you might be surprised to discover that the vast majority of business sales (around 70-80 percent of all transactions) are financed in this way.

Instead of paying you one lump sum, your buyer pays out the agreed sale price over a series of installments and they may also pay you interest on these amounts too.

So, here are 6 reasons why you should consider seller financing when selling your business.

1. You’ll sell your business for more

Many sellers who are waiting for that elusive cash buyer don’t realise that sellers who offer seller finance receive around 86% of their asking price, while sellers who sell for cash only receive on average 70% of their initial expectation.

2. You can earn interest on seller finance

In addition to selling your business for more you may also receive interest payments on the seller finance, which can add significantly to the agreed sale price.

3. You should sell your business faster

Just like when buying a house, they’ll be very few buyers for your business who have the resources to pay for your business upfront.

Seller finance is effectively a “mortgage” for buyers, and it takes away one of the biggest barriers to the sale of your business: buyers having to raise all of the money up front in order to proceed with the purchase.

4. You might receive tax benefits

When you offer your buyers seller finance perhaps you can continue to depreciate the assets of your business and obtain tax benefits until your buyer pays the final instalment of seller finance.

You might also be able to spread the tax owed on the money achieved for the sale of your business rather than having to pay it all in one financial year. Please ask your professional advisors for bespoke tax advice.

5. You can receive a much higher interest rate

If you sell for cash and invest that lump sum in a bank you will actually receive a much lower rate of return from the bank than the rate of interest you can receive if you offer seller finance.

6. You’ll engender confidence in your buyers

Seller finance means you still are financially invested in the business, and gives potential purchasers the confidence that you think the business will succeed and generate enough profit.

 

Seller finance is a solution for BOTH the seller and the purchaser

Seller finance is not only the most common way of financing a business sale…it just makes good business sense. Seller finance is a solution for both the seller and the purchaser removing financial barriers to purchase and engendering confidence in your buyers, while at the same time potentially lowering your tax bill, increasing your sale price and bringing in an additional income stream.

An experienced Business Broker will be able to suggest ways in which vendor finance might be offered and incorporated into a business sale transaction… and it’s often easier than you might imagine.

It’s simply a case of balancing risk and reward and coming up with a position that works for all parties involved. For example, assets can be transferred over a period of time and in line with agreed stage payments. This approach reduces risk for the seller and helps the buyer with cash flow – it’s a win/win which keeps a deal on track.

In a market where 90% percent of people who who begin the search to buy a business never complete a transaction, and over 80% of businesses don’t sell…

…offering seller finance can often make the difference between a successful business sale and failure.

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