Lenders Financing Business Acquisitions Looking for Seller Financing to Mitigate Risk
Owners looking to sell their businesses - and entrepreneurs hoping to buy them – are facing challenges when it comes to financing the sales. As interest rates have climbed over the past year, it has become more difficult for buyers to raise cash to meet business sellers’ asking prices.
BizBuySell’s latest Insight Report highlights how climbing interest rates are changing the economics of business acquisition financing and putting pressure on prices and valuation multiples.
As the Fed continues to raise interest rates, business buyers continue to find creative ways to finance their acquisitions. More than buyers, the Insight Report notes, business owners hoping to sell are coming to terms with the fact that prices are cooling from last years all time highs, and they may have to contribute to creative financing to get deals closed.
Katrina Loftin, Co-Founder of M&A Business Advisors says, "We are seeing at least some amount of owner financing on almost every transaction," and "Many lenders are requiring at least a 10% note from the seller."
Previously, pressure to offer some amount of seller financing came primarily from buyers trying to close a gap in financing. Now, lenders are looking for sellers to finance some portion of the sale price, to help offset some risk. Lenders want to know that the business can service the debt. While seller financing doesn’t directly improve debt-service ratios (unless the term is extended) it does show lenders that the selling owner is confident that the business will continue to generate cash to pay its monthly obligations.
While offering to finance a portion of the sale means business owners don’t quite get the "clean break" they are looking for, they do benefit over the longer term. Increased interest rates mean seller’s finance at higher rates earning a little extra from the sale. Additionally, the deferment of payment means business sellers defer their capital gains tax liability, and maybe even reduce it.
For more on financing the purchase of a business, see the articles in our Financing Learning Center.