Nashville, TNSell Your Business

What is Seller Financing?

By January 28, 2020 No Comments
What is Seller Financing? - CGK Business Sales

M&A brokerages and business sales advisors will tell you that most businesses for sale offer some sort of seller financing. Seller financing is simply a type of loan from the seller to cover all or a portion of the purchase price for a business. The rest of the purchase price is covered by a down payment or an outside loan (or a combination of the two).

With seller financing the seller of the company essentially acts as the business buyer’s bank. That means you assess the buyer’s creditworthiness, you charge interest, and cover the cost of the sale. When you have a seller financing agreement, you’ll receive a large down payment and then regular payments for the next several years. And because it’s done through the seller instead of a traditional bank, you can often avoid obstacles or requirements that might have hindered your sale. That means seller financing allows sellers to command a higher price for their business.

Seller financing is common and popular, so many buyers will expect it to be available. They will also likely move on to another opportunity if seller financing isn’t an option.

 

Due Diligence

Seller financing adds another layer of due diligence to selling your business. Now you must also ensure that the buyer is financially qualified to buy. To do that, you’ll do much the same as a bank – you’ll review their credit history and financial statements, review their banking information, and possibly even review their business plan for after they’ve acquired your business.

If the buyer defaults, you may lose the part of the business purchase money that hasn’t been collected yet. Then you’ll have to find a new buyer, and the business will likely be in poor shape, making it even harder to sell. That’s why it’s crucial that you perform your due diligence and thoroughly vet your buyer.

 

Initial Terms

To protect both sides, there are always terms to the seller financing agreement. A common clause would allow the seller to repossess the business within 30 to 60 days if financing fails. Other contractual stipulations such as inventory requirements are aimed at making sure the business remains profitable during the repayment period. Whatever the terms are, the seller and buyer must negotiate them during the initial negotiation period. A skilled and experienced M&A advisor or business broker is vitally important to get these terms correct.

 

What Do Seller Financing Terms Typically Look Like?

Sellers often finance the purchase of their business over a five to seven-year length of time. A point of contention is often exactly how much the seller should be willing to finance. There are no rock solid rules, but about 60% is common. The rest can be covered by an additional loan or a down payment, but of course larger down payments inspire more confidence in the seller.

 

Seller financing is not a DIY solution. It requires paperwork and experience to pull it off correctly. Neglecting the details of a sale, or simply doing it improperly can lead to disaster. Partner with a skilled business broker like CGK Business Sales to make sure both the buyer and seller are protected, and the whole process is beneficial to both parties. Our Nashville office or any of our locations around the country can help make it happen. Contact us today.

 

CGK Business Sales

CGK Business Sales

CGK Business Sales is a leading mergers and acquisitions and business brokers firm. Offices nationwide. Proprietary sales process. Credentialed advisors who close the deal. Local. Different. Better.