M&A Broker Tips: How to Sell a Business – Seller Financing
M&A brokers and advisor firms know that most businesses for sale offer some type of seller financing. Seller financing in business sales covers all or a portion of the purchase price in the form of a loan. The remainder of the purchase price for a company may be covered by either a down payment, an outside loan, or some combination of the two. This is why down payments for business mergers and acquisitions are often larger than down payments for other purchases, hovering somewhere around 30-40%.
With seller financing, the seller of a company essentially acts as the business buyer’s bank. That includes assessing the buyer for creditworthiness, charging interest, and covering the cost of the sale. With a seller financing agreement, you’ll get a large down payment, as well as regular payments for years to come. Seller financing in a business sale also can remove the third party lender obstacles, costs or requirements. It can help otherwise qualified buyers fund the purchase price of a sale. In so doing, seller financing allows sellers to place their business for sale on the market for a higher price.
Because seller financing is common and popular, sellers who are not open to seller financing arrangements immediately limit the number of potential buyers.
Seller Financing Due Diligence
A seller who intends to finance the sale must ensure the buyer is financially qualified to make the purchase, not just qualified to run the business. That includes performing the functions a bank usually performs, such as reviewing a buyer’s credit history and financial statements, looking at any history of bankruptcy, reviewing banking information, and possibly reviewing the business plan for the buyer’s business acquisition.
With a seller financing arrangement, all funding may come from you. If the buyer defaults, you may lose the carried part of the business purchase money. You’ll have to find a new buyer, and possibly sell at a much smaller price, since a buyer who defaults may also have neglected other financial aspects of the business.
Initial Terms for Seller Financing
Most seller financing agreements allow a seller to repossess the business within 30 to 60 days if financing fails. This saves the buyer from a disastrous business undertaking, and prevents the seller from losing their investment. Most seller financing arrangements carry other contractual stipulations, too. Many contracts contain a clause involving inventory, requiring new owners to maintain a certain quantity of inventory during the repayment period. This offers some assurance that the business will remain profitable, thereby increasing the odds that the seller will recover their investment. The buyer may be required to agree to other terms aimed at keeping the business profitable. The seller and buyer will negotiate these terms during the initial negotiation period, usually with the assistance of an experienced M&A advisor, broker, investment banker, or other business intermediaries.
Seller Financing: Beneficial to Both Buyer and Seller
Both sellers and buyers stand to benefit from seller financing, since this arrangement removes intermediaries and allows both parties to set agreeable terms. Because buyers often prefer seller financing, sellers interested in increasing the number of potential business buyers should consider this option. Some buyers disregard arrangements that don’t include seller financing, and won’t negotiate to include it. Including seller financing as a key feature of your sale automatically widens your potential sales audience.
Sellers who offer financing send a clear message about their business: that they are confident in its short and long-term prospects for success. That degree of confidence on behalf of a seller willing to take a risk speaks volumes about the business, further increasing buyer interest.
What Do Seller Financing Terms Typically Look Like?
A five to seven-year length of financing is common. The amount which a seller should finance is a common sticking point, since many buyers also rely on outside financing. There are no hard and fast rules governing a seller’s contribution to the financing agreement, but it’s common to finance about 60%. The rest may be covered by a down payment or additional loan, though larger down payments typically inspire more confidence in sellers.
Seller financing demands quite a bit of paperwork and thought. For most business owners, this adds to the hassle of a sale. But neglecting the fine details of a sale can lead to disaster, and potentially lowers the price of the business or the favorability of financing terms. Partnering with a skilled attorney or M&A Advisor firm, broker or investment banker—and ideally, with both—protects all parties, as well as the business itself. When the business is protected, so too are both buyer and seller, since the investment both sides have taken a risk on depends on the business’s success and stability.
About IBG Business:
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