Thursday, October 25, 2012

5 Steps to a Successful Seller Financing Deal

Although the economy seems to be improving slightly, tight credit markets mean the days when you could simply get a large check and be done with the sale of your small business are long gone.

Because of lending restrictions implemented after the 2008 recession by banks large and small, even the most enthusiastic buyer candidates may not be able to find the capital to fund a business acquisition. And as an owner, there is nothing more frustrating than having listed a business that garners plenty of attention but attracts no buyers who can meet your asking price.

In most of those situations, the business is actually a great candidate for sale. But because of challenges in the lending market, you as an owner are left with two options: either lower your asking price or work with the buyer to overcome their financial barriers.

Since most sellers don't want to leave money on the table by lowering their asking price, more and more are deciding to finance part of the sale themselves. In this case, sellers usually receive a portion of the purchase price up front and the rest (usually around 20-50 percent) will be paid by the buyer over time, with interest.

The trend has become so common, in fact, that a recent survey of national business brokers found that nearly 90 percent of brokers cited seller financing as "important" or "essential" to speeding up the business sale process. Only two percent found it unnecessary in today's market.

So how can you effectively execute seller financing without compromising your long term business sale goals? Here are a few tips:

1. Evaluate the Risk

A cash sale is an essentially risk-free transaction for the seller. Once the deal is done, you can comfortably walk away from the business with money in the bank. In a seller-financed transaction however, you continue to be tied to the business for several years after the sale is complete, until all purchase payments have been made. If the business succeeds, the new owner pays back the principal with interest and everyone wins. But if the new owner struggles and can't make the loan payments, you could suffer the loss of interest income and incur additional costs to collect the debt. In the worst case, the new owner can't make the payments and you get the business back through the loan default; something nobody wants to have happen.

The bottom line is that an owner-financed sale needs to be evaluated as a business investment.