Pros and Cons of Seller Financing

Pros and Cons of Seller Financing

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Small businesses that are being sold in this tough economy are almost guaranteed to go with seller financing in order to close the deal. Most lenders have tightened up credit to the point where only the strongest deals have a chance of receiving bank backing.

Gone are the days when banks routinely approved “goodwill financing” as lenders are much more interested in financing what is tangible than ethereal attributes such as brand perception, customer loyalty or employee happiness. While those things are important for any business, banks are looking to finance concrete numbers only.

Getting Your Business Sold

So, what does this mean for you if you are selling your business? Is owner financing of the last resort or are there some aspects of this option worth considering?

With the tighter lending restrictions, bankers who are willing to finance small business sales are only covering 50-60 percent of the purchase price – the buyer or seller must cover the rest. With buyers typically putting 15-20 percent down, the remaining funds need to be financed. That is where the seller comes in.

Sellers aren’t usually thrilled to offer financing for their businesses, preferring to close the deal and walk away with no further obligations. But, that option leaves open the possibility for the seller to take back the business if the new owner doesn’t meet certain performance benchmarks.

Securing Your Position

Benchmarks ensure that the new owner doesn’t drive the business into the ground without paying the consequences. If the business begins to flag, then the seller can retake possession to protect his stake. Of course, under that legal arrangement the buyer loses his down payment as well as his interest in the business.

Small business sellers may look at seller financing with skepticism especially if it leaves open the possibility that they may have to run the operation again if the new owner can’t. But the leverage exerted by the seller could actually help the buyer work diligently to make sure that his own interest in the company is preserved.

Seller financing may not be the favorite choice of either party, but if that’s what it takes to get the deal done, then that is what needs to be considered.

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