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by Tom West
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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 69.9 percent of the asking price. This
adds up to a 15.8 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. The seller
who asks for cash receives, on average, a
purchase price of 36 percent of annual sales;
compared to the seller accepting terms, who
receives an average of 42 percent of annual
sales.
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 sellers, they will, in
most cases, be helping themselves as well.
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