Sellers: Why You Should Finance Your Buyers
Deciding to retire is a huge hurdle. You’ve grown a small empire from the seeds and soil of sweat, tears, and sacrifice. It’s a beautiful vision you’ve created, but it’s time to set your sights elsewhere.
Now, imagine that you’ve found the perfect buyer. As you’re packing up your desk and pulling down the family photos, there’s a hitch – the buyer wants you to partially finance the deal.
If you’re like many sellers, you’ll balk at the idea of providing monetary support to the very person taking over and profiting from your business. You’re not a lending institution, and why can’t a bank provide the full loan?
For some deals that’s possible, but for many others it’s a definite no-go. Most banks and credit unions want to see the seller have some stake in the business going forward. It ensures a greater chance for the business’ survival and the return on their loan.
The Nitty Gritty
What exactly does seller financing look like?
Boiled down to its basic terms, it’s the seller carrying a promissory note for the buyer. While each deal is different, a promissory note for a bar will look like a promissory note for a large retailer. The key difference is terms. It’s up to all parties involved to outline interest rates, default penalties and timelines.
Done right, a seller should end up with a bigger return.
There are many pros to offering carryback, but the four biggest are below:
- Increased purchase price – the less money a buyer has to put down, the higher the price can go.
- Receiving regular interest payments in addition to down payment – monthly payments from the buyer can feel a lot like absentee ownership: none of the work, but all the reward
- Lower income taxes – the government will charge you less if your taxable income is spread out over time instead of in a lump sum payment
- Better likelihood of sale – many buyers won’t even look at a business that doesn’t have seller carry. They want the business to succeed as it has for you, and your continued investment, even for a short period, ensures that.
What's the Bad News?
It depends on how you look at it. It’s true that offering seller financing increases your risk. You won’t be walking away with the full amount, but a portion.
However, as a business owner you’re used to some risk exposure. If you hadn’t been willing to take chances, invest your time, your money and much of your life, you wouldn’t be at this rewarding juncture. Plus, the safeguard of the promissory note is in place should something go wrong.
Some sellers want to cut and run. If you’re no longer at the helm, then further involvement with a business is tiresome. After all, you’re selling your business because you don’t want to work it anymore. Having a continued financial interest in a company does keep you tied, but it also keeps your former employees safe in their jobs.
While you won’t immediately get the full purchase price by offering carryback, you’ll most likely surpass that amount through interest payments from the buyer. If you do have plans that require the full amount, you’ll need to find an all cash buyer, and those are a rare breed.
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