The brokerage industry is often confronted with the challenge of discussing financing. Every financing scenario is different due to the wide variety of available alternatives and the inherent diversity of individual businesses. Buyers may count on Transworld to help them identify the best financing solution for their needs. Paying cash, seeking bank finance, or turning to private investors are all well-known choices. However, alternative financing options, such as seller finance, may make your firm more marketable to potential buyers.
When a seller offers to finance, the buyer and seller enter into a promissory note (basically a contract) for a set period. If the buyer and the seller choose this method of financing, the down payment will be specified in the promissory note. The amount of the remaining debt is typically spread out over 3, 5, or 7 years, with a down payment of 40-50%. The cost of borrowing for the outstanding debt will range from 4.75% to 7%.
Discussion of Seller Financing's Benefits and Drawbacks
Seller financing allows for smoother transactions all around. Whether you're a buyer or a seller, your perspective on the benefits and drawbacks of seller financing will be unique. Through Seller Financing, the seller maintains some "skin in the game," or interest, worry, and faith in the business's continued success, which benefits the buyer.
The seller can keep leverage and negotiate for a higher price while benefiting from a streamlined sale transaction timeline made possible by the inclusion of finance. On the other hand, buyers are aware that they must provide a guarantor for the loan because the sellers are also the loaning bank. When dealing with purchasers that aren't creditworthy, sellers risk default. Transworld, on the other hand, takes the necessary precautions to assure and validate that our buyers are well qualified to engage in Seller Financing before they even look at your company for sale.
Finally, Seller Financing permits sellers to increase their equity profit while postponing their taxable gain. Put another way, the seller profits from the steady flow of extra money from the interest paid on the debt the buyer owes. In addition, the seller can take advantage of tax deferral and not worry about being placed in a higher tax rate because of the sale of their business.
The Basics of Seller Financing for Commercial Deals
Today, owner financing is commonplace in business sales, accounting for 80% or more of all transactions, even those backed by the Small Business Administration. The owner must put up at least 10% of the total for most loans. In addition, BizBuySell.com reports that the asking price for a business increases by 15% when seller financing is offered. Seller financing can benefit all involved parties because it makes the deal easier and cheaper to close.
Understanding the Motivation Behind Seller Financing
Simply put, seller financing entails the seller of a firm making a loan to the purchaser of that business. There are many advantages to negotiating seller finance for the buyer.
-The buyer cannot afford to purchase the company at the current asking price.
-There is no chance of getting bank finance for this business deal.
-Questions have been raised about the company's viability in the absence of the current owner.
In addition to the buyer's motivations, the company has an advantage over the competition if the owner is ready to finance at least a portion of the sale.
How does Seller Protection Work in a Seller-Financed Transaction?
Necessary steps a seller can take to safeguard themselves during a seller-financed transaction include working with a business brokerage agency like Transworld and consulting an attorney. Professionals familiar with this form of financing are crucial to the transaction's success because they can draft contracts that safeguard the interests of the buyer and the seller throughout the entire process. A promissory note outlining the deal's stipulations, as previously discussed, will be drafted. The seller's options for resolving a buyer default will be spelled here.
For instance, in the case of the sale of a local company, the seller may have the option to reclaim ownership. Other avenues of recovery include securitizing the company's assets or securing a personal guarantee from the purchaser. With the aid of the transactional attorney, a skilled broker can incorporate any or all of these stipulations into the promissory note to safeguard the seller against unfavorable outcomes.
Seller protection can also be ensured by reviewing information on the buyer while the buyer is conducting thorough research on the firm. As a bare minimum, Transworld suggests that the vendor check the buyer's credit report and talk to some references. It can illuminate the seller and the deal's future by learning about the buyer's history, business and financial credentials, and objectives for purchasing the company.
This Is a Promissory Note
Promissory notes are written to give purchasers enough time to save the money needed to pay back the principal amount and interest. To ensure the smooth operation of the firm, it is essential to structure the purchase price so that the buyer has sufficient cash flow. This is done so that the loan terms are neither so restrictive as to force the buyer out of business nor so lenient as to allow the buyer to coast on the purchaser's loan.
Because of this, the Seller Financing repayment period might range from one year to several decades, depending on the loan size, the company's existing and forecast revenue, the buyer's capital expenditure, and the buyer's financial situation. Though typical loan terms are usually 3 to 5 years for main street businesses. The loan's interest rate is relatively stable and close to the going rate for bank loans.
It's Full Circle for Seller Financing
Seller financing is an under-discussed option that benefits both the seller and the buyer. Both the seller and the buyer benefit from this arrangement; the former has a better chance of finding a qualified buyer thanks to the more attractive asking price and the performance bond, while the latter has more financial clout to use in their pursuit of the purchase of the business of their choice.
The brokers at Transworld know their way around a business transaction like no one else. Contact our brokers to learn more about seller financing today!