Nearly 90 per cent of businesses owners have never sold their business prior to. Therefore, if you’re just beginning your search for ways to market your business but aren’t sure what to do, you’re not all on your own. One of the numerous terms that are discussed about business acquisitions or sales is financing for sellers. This is a term that quickly triggers an unfavourable reaction from the majority of sellers. However, it should not be avoided! It must be studied and used to assist in selling your company.
The majority of companies selling today have a portion of financing by the owner. With an average rejection rate of 80 per cent and a rejection rate of around 80%, applying for the SBA request process is typically unsuitable for most buyers and businesses. Companies that offer the financing of sellers along with sales generate more inquiries and an increase of 15% on the cost of selling (estimation from Bizbuysell.com). There are numerous benefits and specific risks associated with seller financing, and it is essential that both parties are comfortable with the transaction.
In the subsequent discussion, I will discuss frequently asked questions on the topic of financing for sellers to open talks for potential sellers and their buyers.
What is Seller Financing?
Seller financing is a type of loan given by the owner of the business to the new owner of that business.
Why Seller Financing?
Buyers can negotiate seller financing due to a variety of reasons. For one, they might not be able to finance the company at its total asking price. The second reason is that the business deal as it stands won’t be able to qualify for the traditional loan. In addition, there is an element of doubt as to whether the company will continue to succeed even without the previous owner as its leader. Therefore, an owner’s decision to finance a part of the sale usually gives that company an edge over its competitors, taking away some of the buyer’s concerns.
How is the Seller Protected?
It is crucial that a sale financed by the seller be managed by experts who are able to provide advice and create documents that safeguard both parties’ rights. Typically the promissory note is prepared that shows the terms of the agreement. It also includes the remedy that the seller is entitled to in the event that a buyer fails to pay the note. In the event of the sale of a small-sized company, one of the possibilities is the seller has the option of taking their business previously owned by them back into their ownership. Other recourse options could include making those assets belonging to the company as collateral or an individual assurance of the seller. Employing an expert consultant to draft the conditions of the note can ensure that recourse actions are appropriately planned.
What Other Terms Are Outlined in the Promissory Note?
The conditions of the note were designed to allow the buyer enough time to repay the loan. It is essential that the payments are in amounts that the purchaser could manage with the income from their business while still operating the company at a high level. The last thing either desire are for loan terms to restrict the buyer and ultimately force them out of business. This is why the duration of the seller financing is contingent upon factors like the amount of loan, the revenue of the company, and the capital amount that the seller is willing to make. The interest rate on a note for seller financing is usually similar to current banking rates.
Author: Al Fialkovich, Managing Director of Transworld Denver
If you’re thinking about selling your business or have additional concerns regarding seller financing, you can go to our website.
The article is composed by Al Fialkovich, the Managing Director of Transworld Business Advisors of Denver. Transworld is the most reputable business brokerage company in Colorado. Our business brokers have the highest and broadest range of listings for businesses available, including more than 100 listings each year. Our service area includes the entire state of Colorado with a focus on the Denver Metro, Boulder and Golden areas. We support entrepreneurs who have visions when buying a company or selling a company in Colorado with an emphasis on helping closely-held and family-owned companies develop their strategies to the next phase.