Seller Financing Pros and Cons

While seller financing can help push through a sale in today’s tight market, it doesn’t come without a hitch.  There are a number of helpful tidbits to know when deciding whether this option is a good one for you or not. 

Pros

·         As the seller, you don’t have to leave money on the table, sitting by squirming while an eligible buyer has to pass you by for lack of funding sources.

·         If you have faith that the new owner will succeed with the business it might be the right decision.  You will get full paid back with interest.

·         Your willingness to finance the sale gives you substantial bargaining power.  It will often result in a substantially higher end price, plus, you will be paid interest until the loan is paid off.

·         As long as the seller requires a substantial down payment, some of the risk is transferred to the buyer, minimizing your exposure.

Cons

·         If your feel more apprehensive about the prospective buyer than you feel trusting, this may not be the right option for you.  You risk not only the principal and interest on the loan, but may also incur additional costs required to collect the debt.

·         Financing more than 2/3 of the sale can put the seller in a far too risky position.

·         You may feel backed into a corner, with no other option than to finance the sale, but agreeing to more than you are comfortable with is not going to be to your advantage in the long run.

If you’ve decided that seller financing is for you, it will be to your advantage to include that in your marketing for the sale of your business.  LittleBizTrader.com is an online business-for-sale marketplace where it has become evident that the listings offering seller financing get far more hits than those that don’t.  BizChecker is an online tool that can be very helpful throughout this process.

Agreement For Sale of Business

Buying a business or selling one requires familiarity with certain legal documents, not least important of which is the business for sale contract or agreement.  Variations of this document certainly exist, but they all contain the same basic elements.  The purpose, in a nutshell, is to lay out in detail precisely what is being sold.  It will spell out the price and exact terms that have been agreed to.

The standard contract will list the names of the buying and selling parties, define the purpose of the document, and define terms to avoid any potential confusion by either party.  Some of the topics that may be included are: amount of deposit; employee retention and related details; treatment of existing liabilities; warranties of existing equipment; assets to be included in sale.

The more proficient you are in the language of the documents used in the exchange, the happier you are bound to be with the outcome.  There will be fewer surprises, mysteries, and dissatisfactions.  So, for this document here is a brief key to some of the most common and important terms:

Due Diligence. The process where the buyer has the opportunity to thoroughly investigate all documents offered up by the seller.

Cash flow. A statement offering a snapshot of the amount of money the company has at a given moment in time.

Letter of intent. A good faith letter usually preceding the contract that may include some legally binding provisions that will also appear in the contract.

Seller’s discretionary cash flow.  Takes a look at how the seller chose to pay for items through the company, rather than personally, for greater tax deductions.  Since the buyer may choose differently, determining this amount will help to more accurately evaluate the amount the business has actually earned.