Financing is one of the biggest hurdles when purchasing a business. While SBA financing is popular and an excellent option to consider, it is not always possible. In addition, the SBA process can be long and arduous in some cases. Today we want to discuss one option that Transworld Business Advisors brokers are experts at, and that is seller financing.
Seller financing, also known as owner financing or seller carry, is a financial arrangement in which the seller of a business provides financing to the buyer as part of the purchase transaction. Instead of the buyer relying solely on traditional sources of financing like their own cash or an SBA loan, the seller effectively becomes a full or more often, partial lender and extends credit to the buyer. This is usually accomplished with an agreed to Promissory Note (Seller Note).
Seller financing can be a useful strategy for both buyers and sellers when purchasing or selling a business. Here are some key points to consider.
For Buyers
Seller financing can make it easier for buyers to secure the necessary funds to acquire a business, especially if they have difficulty obtaining an SBA loan for some reason.
When sellers are willing to finance a portion of the sale, it often indicates their confidence in the business's future success. To be clear, just because a seller does not want to offer seller financing, that should not necessarily be considered a negative or a lack of confidence in a business. Sometimes seller financing fits and sometimes it does not. But the perception from buyers often is that a business owner post sale may be more motivated to ensure the business's continued prosperity if they are carrying a note.
In most cases, seller financing will result in lower closing costs for the buyer because it bypasses SBA fees which can be significant.
For Sellers
Offering seller financing can attract a wider pool of potential buyers, as it makes the purchase more accessible.
Sellers may also be able to command a higher selling price by offering financing, as buyers are willing to pay a premium for the convenience and flexibility of this arrangement.
Most often we see seller carry along with a significant amount of cash so a seller is not carrying the entire purchase price, and the buyer has an sizeable cash investment as well.
Potential benefits for a seller included:
Interest Income from the note. Potential tax benefits such as spreading capital gains over multiple years. A seller should always consult their tax advisor for advice but typically a seller is only going to pay tax on funds received so if that is spread out over time, logically so is the tax burden.
The business or its assets may serve as collateral for the seller financing, giving the seller added security in case the buyer defaults on payments. Additionally, a seller note is usually also personally guaranteed by the buyer.
In summary, seller financing can be a valuable tool in business acquisitions, providing flexibility and benefits for both buyers and sellers. It can help bridge the financing gap and make business transactions more feasible, but it also requires careful planning and legal documentation to ensure a successful outcome.
If you would like to know more about seller financing whether you are a buyer or a seller, our business brokers here at Transworld would be happy to help guide you.