Seller financing: a very common way to put a deal together

Only a small percentage of the population is able to go through life without using some form of financing at some point. Most people have little choice but to finance everything from their home and car purchases to their college education. Now, with that stated, most business owners would love to receive an all-cash offer for their business. But the reality of the situation is quite different. The facts are that seller financing is very common, and it is sometimes the only way to put a deal together.

Seller financing is when a business’s owner offers the buyer a loan to cover a portion of the price of the business. It means the buyer makes a down payment in cash as soon as the deal closes. The seller’s loan covers the remaining amount of the sale price, plus interest, according to the terms set by the lender. The buyer may only get financing from the seller or use it along with some other form of financing.

Buyers may see a red flag if you refuse to provide seller financing

Sellers have to be ready and willing to entertain the idea that they may, ultimately, be called upon to handle some aspect of financing if they want to sell their business. It surprises many to learn that if a seller is not willing to finance the sale, then buyers begin to worry and may even see this as something of a “red flag.” The reason for this is that many buyers feel that if a business is a solid investment, then the business will be profitable and repaying the seller should be no problem.

Buyers may worry that if a seller isn’t willing to help with financing there could be a “hidden” problem with the business. It might occur to them that sellers are “jumping from a sinking ship.” It is important that sellers keep this important aspect of buyer psychology in mind when addressing whether or not they are willing to finance.

Buyer psychology plays a major role in another aspect of seller financing and that comes in the form of collateral. Sellers may want to have some form of outside collateral to secure the loan on their business. While this may seem perfectly understandable to the seller, buyers can have something of a nervous response to this issue as well. As much as buyers worry that a seller’s refusal to provide financing is a red flag, the same holds true for sellers who seek collateral. Once again, the concern is that if the business was healthy and thriving there should be no need for collateral. The buyer is left wondering, “What is going on here? How worried should I be? Why do they need collateral if this business is so great?”

Buyers usually NEED the seller financing

Typically, buyers are “maxed out” when buying a main street business. They are allocating most of their available funds to the down payment on the business. That means they will be unlikely to “push all their chips in” and gamble everything by also putting up the home, retirement funds or other collateral in the process. Sellers need to see the situation from the buyer’s perspective and remember that a collateral requirement could mean that if the business fails, the buyer could be left with nothing.

Most of the deals in main street business sales market have a form of seller financing involved. Other than that, the number of buyers who can afford to pay all cash or number of deals that can be closed by SBA loan along with buyer’s cash is very limited that lowers the chance of selling the business dramatically.

Use a professional help to navigate the seller financing

Navigating the complex interaction between buyers and sellers is no easy feat. It requires a careful balancing of several different skills, ranging from understanding finance to psychology. Working with an experienced business broker can help buyers and sellers connect and find workable agreements so deals can get made.

This complexity gets worse in specific types of businesses. For example, if you are considering to sell your manufacturing business, there are different things you need to be careful about. This article on our website considers those important aspects: “Selling a manufacturing business; How to prepare?”

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