For Brokers
Back to Seller ResourcesThe Importance of Seller Financing
In the face of an economy that has made it increasingly difficult to close deals, seller financing has become essential.
In fact, there's been perhaps no better time for brokers to educate business owners on the importance of offering financing, as it's the only way most of today's buyers can afford a business. There's nothing more frustrating than a listed business that attracts a lot of attention, but no buyers who are willing or able to seal the deal. Unfortunately, that's exactly the situation many business owners are facing in the current marketplace.
Most of the time, the business isn't the problem. In fact, a business that generates significant attention in the marketplace is usually a good candidate for a sale. Instead, the issue is most often the buyers' inability to secure financing at the owner's asking price. That leaves owners and their brokers with two options: Either lower the asking price or work with the buyer to overcome sale barriers.
A seller's willingness to finance at least part of a business sale has always been a strong selling point for buyers, but in recent months it has become key. With many potential business buyers unable to access the necessary funds from lending institutions, sellers who decide to offer seller financing are likely to have much more success selling their business than those who do not.
While it sounds like a no-brainer for sellers to offer financing, brokers should ensure they don't do so unprepared. When making the decision to offer financing, there is a great deal to consider and advise in order to help ensure a successful, smooth process. To stay on track, sellers and brokers need to follow some obvious – and some not so obvious – dos and don'ts.
Can seller financing be risky? Absolutely, but under the right circumstances it can also be a financial boon. Here are some key points brokers need to know to advise sellers on the implications of seller financing.
Evaluate the Risk
A cash sale is an essentially risk-free transaction for the seller. Once the deal is done, the seller can comfortably walk away from the business with money in the bank. In an owner-financed transaction, the seller continues to be tied to the business for several years after the sale is complete. If the business succeeds, the new owner pays back the principal with interest and everyone is happy. But if the new owner is unable to make the business profitable, the seller could suffer the loss of interest income and incur additional costs to collect the debt.
The bottom line is that an owner-financed sale needs to be evaluated as a business investment. Like any other investment, there is a certain amount of risk inherent in the decision. If you are comfortable enough to invest in the new owner, then it could be very beneficial to finance the sale yourself. But if you aren't confident the buyer can make the hotel a success, you'll want to think twice before advising a seller to offer financing as an enticement to close the deal.
Advertise the Seller's Willingness to Finance
Some sellers are hesitant to advertise a financing option because they aren't totally sold on the idea and view it solely as a last resort. The truth is that if they aren't comfortable with the idea of financing, even after you have explained its importance, they shouldn't consider it as an option at all. If they are, though, it is important to include the information as a selling point in marketing efforts.
One of the most productive avenues for advertising a seller-financed company is online. Seller financing has become so important in the business-for-sale marketplace that at BizBuySell.com, we recently launched a feature that allows sellers and their brokers to clearly advertise their willingness to offer it, and buyers to search only for businesses that are at least partly seller-financed. These details now appear prominently alongside other essential information such as business description, location, asking price and cash flow.
Leverage Interest and Increased Sales Prices
If the buyer is a good investment risk, the seller stands to benefit greatly by self-financing. Too many sellers view financing as a desperate last attempt to unload the business when they should be viewing it as a resource for enhancing the benefits of the sale.
From the start, a seller's willingness to hold paper increases the final selling price of the business. Partially-financed sales typically result in a price that is more than 15 percent higher than their cash sale counterparts. That means a seller can leverage his or her willingness to finance as a bargaining tool during negotiations.
In addition, financing the sale provides the opportunity to multiply the principal value of a business through future interest payments from the buyer. A financed sale garners a much higher rate of return than many other investment vehicles with a five to seven year note at 8 to 10 percent interest as the norm.
Don't Waive the Down Payment
It's true that an owner-financed sale can be a risky venture, but a healthy down payment can minimize a seller's exposure by distributing an equal or greater amount of the risk to the buyer.
Generally speaking, it's in a seller's best interest to finance no more than 1/3 to 2/3 of the sale price. If they decide to finance more than that, they need to have a legitimate reason for doing so. For example, if they are selling the hotel to a family member, they may have a vested interest in financing an amount beyond the normal range. The key to remember is that as a seller's financing commitment increases, so does the risk.
