Seller Financing

The majority of business sales include some form of seller financing. Typically, seller financing is when the seller provides a loan to cover part of the purchase price. The down payment covers the rest of the purchase price, but other financing sources are often used as well. Summed up another way, the seller is essentially acting as a bank for the buyer.

When sellers offer financing, it often also helps them achieve a higher final sale price. Sellers who are not open to seller financing will likely limit their possibilities.

Performing Due Diligence

When a seller opts for seller financing, it is necessary to do much of the work that a bank would usually perform, for example, checking a potential buyer’s credit report, financial statements, and other key financial information. After all, if you opt to offer seller financing, then you’ll want to ensure that your buyer will not default.

Contracts usually allow for the seller to take back a business in 30 to 60 days if financing fails. This way, the buyer can avoid a potentially serious business problem.

There are often other contractual stipulations as well. A common clause for businesses involving inventory is that new owners need to maintain a certain level of supplies during the payment period.

Providing Benefits for Both Parties

It should also be noted that seller financing is of considerable interest to buyers. Sellers looking to attract as much attention to their business as possible will want to consider this route. Offering this kind of financing sends a very clear message. When a business owner is open to seller financing, he or she is inidicating his or her great confidence the business will generate both short term and long term revenue. That level of confidence speaks volumes to buyers about the health of the business.

What Do Terms Typically Look Like?

In terms of the length of seller financing, five to seven years is typical. The issue of how much a seller is expected to finance is something else that draws considerable attention.  While there are no steadfast rules as to what percentage sellers typically finance, it is common for sellers to finance up to 30% of the total purchase price.

Finally, seller financing does have a good deal of paperwork, and points to consider. Opting to work with an attorney or business broker is absolutely essential to protect all parties involved.

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Copyright: Business Brokerage Press, Inc.
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