Seller Financing: It Makes Dollars and Sense
When contemplating the sale of a business, an important option to consider is seller financing. Many potential buyers don’t have the necessary capital or lender resources to pay cash. Even if they do, they are often reluctant to put such a hefty sum of cash into what, for them, is a new and untried venture.
Why the hesitation? The typical buyer feels that, if the business is really all that it’s “advertised” to be, it should pay for itself. Buyers often interpret the seller’s insistence on all cash as a lack of confidence–in the business, in the buyer’s chances to succeed, or both.
The buyer’s interpretation has some basis in fact. The primary reason sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease payments–for any reason–the seller would be forced either to take back the business or forfeit the balance of the note.
The seller who operates under the influence of this fear should take a hard look at the upside of seller financing. Statistics show that sellers receive a significantly higher purchase price if they decide to accept terms. On average, a seller who sells for all cash receives approximately 70 percent of the asking price. This adds up to approximately 16 percent difference on a business listed for $150,000, meaning that the seller who is willing to accept terms will receive approximately $24,000 more than the seller who is asking for all cash.
Even with these compelling reasons to accept terms, sellers may still be reluctant. Selling a business can be perceived as a once-in-a-lifetime opportunity to hit the cash jackpot. Therefore, it is important to note that seller financing has advantages that, in many instances, far outweigh the immediate satisfaction of cash-in-hand.
- Seller financing greatly increases the chances that the business will sell.
- The seller offering terms will command a much higher price.
- The interest on a seller-financed deal will add significantly to the actual selling price. (For example, a seller carry-back note at eight percent carried over nine years will double the amount carried. Over a nine-year period, $100,000 at eight percent will result in the seller receiving $200,000.)
- With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from any financial institution.
- The tax consequences of accepting terms can be much more advantageous than those of an all-cash sale.
- Financing the sale helps assure the success of both the sale and the business, since 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, it is well to note that, in most transactions, buyers are putting a substantial amount of personal cash on the line–in many cases, their entire capital. Although this investment doesn’t insure success, it does mean that the buyer will work hard to support such a commitment.
There are many ways to structure the seller-financed sale that make sense for both buyer and seller. Creative financing is an area where your business broker professional can be of help. He or she can recommend a variety of payment plans that, in many cases, can mean the difference between a successful transaction and one that is not. Serious sellers owe it to themselves to consider financing the sale. By lending a helping hand to buyers, they will, in most cases, be helping themselves as well.
The post Seller Financing: It Makes Dollars and Sense appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
Around the Web: A Week in Summary
The following information has been sourced by Business Brokerage Press for the benefit of the business brokerage community. The views of these articles do not necessarily represent the views of Business Brokerage Press. We hope you find this information helpful.
A recent blog post from Sunbelt entitled “6 Reasons You Should Consider Buying a Home-Based Business” discusses a recent rise in home-based businesses and the pros of buying a home-based business.
Common benefits of buying a home-based business include:
- Reduced overhead
- Greater flexibility
- Increased creativity
- Happier and more productive employees
- Ability to attract qualified talent from other geographic areas
- Tax advantages
Click here to read the full article.
A recent blog post from Viking Mergers & Acquisitions entitled “The Silver Tsunami Is Coming” explores what the next 10 to 15 years may look like as baby boomer business owners get ready to retire and the next generation takes over.
Baby boomers own a large percentage of the nation’s privately held companies. Not only are these owners approaching retirement, but they are also witnessing a lot of change related to COVID-19. Many of them have the bulk of their assets positioned in their business, making it critical to properly prepare for selling and retiring.
Preparation tips include:
- Assemble your deal team consisting of an accountant, financial planner, attorney and business broker
- Establish consistent accounting practices to maximize shareholder wealth
- Develop an organizational chart, job descriptions and employee handbook
- Define your vision, mission and core values
- Get contracts, leases and transferable agreements in order
Click here to read the full article.
A recent article from Divestopedia entitled “How Targeted Should Your Sale Process Be?” discusses how to determine the right number of buyers to approach when selling your business.
The following questions can help you find the sweet spot for your unique deal:
- Is there a small number of buyers who would reasonably have interest and have the financial wherewithal to pay a fair price for your business?
- Is yours a business where very specialized industry experience and knowledge are required in order to get comfortable with the acquisition?
- Are you confident that, among the shorter list of buyers, there will be several bidders who will make attractive offers?
- Will it be damaging to the business to share confidential information to numerous parties?
The answers to these questions can help you determine whether a narrower pool of buyers or broader pool of buyers is best for your deal.
Click here to read the full article.
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Around the Web: A Week in Summary
The following information has been sourced by Business Brokerage Press for the benefit of the business brokerage community. The views of these articles do not necessarily represent the views of Business Brokerage Press. We hope you find this information helpful.
A recent article from Small Business UK entitled “Are people buying or selling a business during COVID-19?” examines buyer interest in light of the COVID-19 pandemic as observed by BizBuySell.
When the shutdown hit, BizBuySell noticed that although searches for businesses for sale on their website dropped dramatically, there were still thousands and thousands of buyers looking for businesses for sale. Interests shifted to industries such as tech, e-commerce, convenience stores, pet stores and gas stations. It seemed buyers had cash and were looking to make a smart move.
BizBuySell decided to talk to buyers and get an idea of their situations and plans. Survey findings include:
- Over 54% had significant cash to use as a deposit
- 80% believed prices would come down
- 38% intended to finance the entire purchase with cash
Click here to read the full article.
A recent article from Forbes entitled “10 Ways To Safeguard Your Interests When Selling Your Business” offers strategies to help business owners protect their interests when selling their business.
These strategies include:
- Vet all parties involved
- Enlist the help of experts
- Only sell the buyer what they are actually looking for
- Get a valuation
- Understand the value of the business
- Make sure the buyer can pay you
- Limit indemnification claims
- Get an upfront payment
- Evaluate tax implications
- Register intellectual property and make specific arrangements for each item
Click here to read the full article.
A recent article from Divestopedia entitled “The Value of a Valuation” explores the importance of investing resources into a business valuation and understanding what factors impact the value of a business.
Factors that impact the value of a business include:
- Supply & Demand – High demand and low supply typically result in a higher sale price.
- Growth – High growth potential that is detailed and credible can lead to a higher sale price.
- Risk – If a buyer perceives a higher risk, they may be inclined to pay less for the business.
- Volatility – How vulnerable a business is to external factors can impact what a buyer is willing to pay for it.
- Synergies – If a buyer sees synergies between their business and the business for sale, or if they want to block someone else from buying the business and becoming a threat to their business, they may be apt to pay more.
Click here to read the full article.
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Around the Web: A Week in Summary
The following information has been sourced by Business Brokerage Press for the benefit of the business brokerage community. The views of these articles do not necessarily represent the views of Business Brokerage Press. We hope you find this information helpful.
A recent article from Talk Business & Politics entitled “M&A broker says business owners are confident in ability to recover from COVID-19” explores how business owners feel about recovering from COVID-19 related economic struggles and how this affects their future plans to sell.
Barbara Taylor of Allan Taylor & Co. polled business owners about these topics. Her findings were that most businesses have experienced a negative impact from the economic shut down, however they are generally confident they will be able to recover over time.
Taylor also found that business owners are still thinking about selling, with some moving forward and some hitting pause for now.
Click here to read the full article.
A recent article from Birmingham Business Journal entitled “2020 Insights into Mergers and Acquisitions” offers insights from two M&A professionals regarding COVID-19 and mergers & acquisitions.
Questions answered include:
- How has COVID-19 affected the M&A pipeline? Is it causing business owners to delay plans to sell?
- What about valuations? How is COVID-19 affecting them?
- In this type of environment, what questions should sellers ask themselves or their advisers before pursuing a sell? What about buyers?
- Are there any tax considerations or COVID-19 relief measures that should be considered when contemplating an M&A deal?
- On the buying side, what should I be looking for when considering buying a company? Are there any particular areas that could be red flags?
- Considering the economic turbulence and potential for a lingering recession, how should buyers and sellers approach M&A transactions?
- What types of firms or companies can assist my company through the M&A process? What types of questions should I ask when choosing one?
- How important is the culture of the other party when considering an M&A deal?
- Are there any special M&A considerations for family-owned businesses?
- How is the aging of the baby boomers affecting the M&A market?
Click here to read the full article.
A recent article from Business 2 Community entitled “5 Facts You Must Know to Successfully Sell Your Business” gives business owners five helpful tips to foster an easier and more successful business sale.
The five tips offered include:
- Failing to prepare, is preparing to fail – Thorough preparation is critical when it comes to selling a business.
- Confidentiality is key – Utilize NDAs and a timed release of sensitive information to help protect the business.
- Detailed Heads of Terms are vital in protecting value – As a seller, utilize the Heads of Terms to agree to as many key points as possible while you still have power in the deal process.
- Focus on quality, not quantity of buyers – Concentrate on strategic buyers who are a good fit for your business so that you can maximize value.
- Don’t do it alone – Assemble a deal team to help with the heavy lifting and ensure a successful transaction.
Click here to read the full article.
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Around the Web: A Week in Summary
The following information has been sourced by Business Brokerage Press for the benefit of the business brokerage community. The views of these articles do not necessarily represent the views of Business Brokerage Press. We hope you find this information helpful.
A recent article from Monitor entitled “AICPA Offers Insight for Valuing Businesses Affected by COVID-19” discusses recently released FAQs from the American Institute of CPAs which are designed to help adjust business valuations based on the CARES Act.
The COVID-19 pandemic and related economic challenges have brought on tax law changes, PPP funding, EIDL funding and the Small Business Debt Relief Program. All of these recent developments bring the potential for one-time events that could alter figures that are inputted when conducting a valuation.
In response to this dilemma, the American Institute of CPAs released a series of FAQs to help valuation professionals navigate these issues when conducting a business valuation.
Click here to read the full article.
A recent article from Pet Age entitled “Building Value When Exiting Your Business” discusses what business owners can do to maximize value when they sell their business. The reality is most businesses are not ready to be sold for top dollar. So what actions can business owners take in the present to prepare for a future sale?
Major areas to look for improvement include:
- Accounting & Financial Reporting – Are your historical financial reports ready, accurate, and insightful?
- Personnel – Do you have the right team in place to support a new owner?
- Process & Infrastructure – Do you have a marketing plan, operations manual, employee handbook and business systems to support growth?
Click here to read the full article.
A recent blog post from Viking Mergers & Acquisitions entitled “10 Tips When Preparing Your Business For Sale” offers advice to help business owners prepare for an eventual sale. The process of selling a business is complex, however it can be made easier by properly planning for the sale.
10 tips for preparing to sell your business include:
- Hire an outside CPA to complete a profit & loss statement and balance sheet monthly
- Complete your tax returns on time
- Carefully track discretionary expenses
- Discuss tax implications of selling your business with your CPA
- Be committed to selling when you put your business on the market
- Record revenues and expenses in real time
- Maintain your facility and keep up the curb appeal
- Get rid of old and unsellable inventory
- Make sure equipment is working properly
- Hire a business broker to represent you
Click here to read the full article.
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