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Do's and Don'ts of Seller Financing

Do's and Don'ts of Seller Financing

In today's tight business-for-sale marketplace, an owner's willingness to finance the sale gives him an edge over the competition. But owner financing isn't for the faint of heart. To stay on track, sellers need to follow some obvious — and not so obvious — do's and don'ts.

There's nothing more frustrating than a listed business that attracts a lot of attention, but no buyers who are willing to seal the deal. Unfortunately, that's exactly the situation many business owners are facing in today's marketplace.

Most of the time, the business isn't the problem. In fact, a business that generates significant attention in the marketplace is usually a good candidate for a sale. Instead, the issue is most often the buyers' inability to secure financing at the owner's asking price. That leaves owners with two options: Either lower the asking price or work with the buyer to overcome sale barriers.

Rather than leaving money on the table, many owners are deciding to finance the sale themselves. Is it a gamble? Absolutely, but under the right circumstances it can also be a financial boon. If financing the sale of your business sounds like a good idea, don't make another move until you've carefully considered the lessons being learned by other seller-financers.

DO assess the risk.

A cash sale is an essentially risk-free transaction for the seller. Once the deal is done, the seller can comfortably walk away from the business with money in the bank. In an owner-financed transaction, the seller continues to be tied to the business long after the sale is complete. If the business succeeds, the new owner pays back the principal with interest and everyone is happy. But if the new owner is unable to make the business profitable, the seller could suffer the loss of interest income and incur additional costs to collect the debt.

The bottom line is that an owner-financed sale needs to be evaluated as a business investment. Like any other investment, the decision has a certain amount of inherent risk. If you are comfortable enough to invest in the new owner, then it could be beneficial to finance the sale yourself. But if you aren't confident the buyer can make the business a success, offering financing as an enticement to close the deal is the worst decision you can make.

DO leverage the benefits.

If the buyer is, in fact, a good investment risk, the seller stands to reap substantial benefits from self-financing. Too many sellers view financing as a desperate measure to unload the business when they should be viewing it as a resource for enhancing the benefits of the sale.

Right out of the gate, your willingness to hold paper increases the final selling price of the business. Partially financed sales typically result in a price that is more than 15 percent higher than their cash sale counterparts. That means you can leverage your willingness to finance as a bargaining tool during negotiations.

The other big benefit of financing the sale is the potential to multiply the principal value of your business through future interest payments. As you might expect, a financed sale garners a much higher rate of return than many other investment vehicles with a five- to seven-year note at 8 to 10 percent interest as the norm. Don't succumb to your buyer's pleas of poverty. Remain firm on charging the amount of interest you consider appropriate for the market and the level of risk you are assuming.

DO advertise your willingness to finance.

Sometimes sellers are hesitant to advertise a financing option because they aren't totally sold on the idea and are only willing to offer financing if they get backed into a corner during the negotiation process.

If you aren't comfortable with the idea of financing, then you shouldn't consider it as an option at all, not even during negotiation. But if you are comfortable with financing part of the sale, you should include that information as a selling point in your marketing efforts.

One of the most productive avenues for advertising a seller-financed company is online. On, a business-for-sale marketplace, we see that listings containing information about owner financing yield a noticeably higher volume of hits than those that don't.

DON'T waive the down payment.

An owner-financed sale can be a risky venture. However, a healthy down payment can minimize your exposure by distributing an equal or greater amount of the risk to the buyer.

If you are new to the business financing game, forget everything you think you know about down payments. A business and a home are two entirely different things. While your home mortgage lender typically requires a minimum down payment of 15 percent or less, business loans usually require a much higher up-front investment.

Generally speaking, it's in your best interest to finance no more than one-third to two-thirds of the sale price. If you decide to finance more than that, you need to have a legitimate reason for doing so. For example, if you are selling the business to a family member, you may have a vested interest in financing an amount beyond the normal range. But as your financing commitment increases, so does your risk.

DON'T do it yourself.

By definition, an owner-financed sale contains shades of a do-it-yourself transaction. Instead of relying on professional lenders for financing, the seller assumes the responsibility for a percentage of the buyer's investment.

However, don't get too caught up in the do-it-yourself mentality. A loan between a seller and a buyer is subject to limitless structures and variations, many of which require the input of professionals to secure airtight collateral, coherent loan terms and adequate insurance coverage. Before you agree to financing, obtain legal and financial advice from a professional you trust.

DON'T be pressured.

There's a good chance that potential buyers will try to push for a seller-financed deal. This is particularly true for buyers who are unable to secure financing from traditional lending sources due to an inadequate down payment or other borrowing obstacles.

No matter how anxious you are to sell the business, caving into buyer pressure for the sole purpose of closing the deal is a big mistake. When a buyer pushes too hard for financing, take a step back and conduct a simple reality check. If you aren't completely comfortable with financing the buyer's purchase, walk away and wait for a better buyer candidate to emerge.

Mike Handelsman is the general manager for BizBuySell, an online business-for-sale marketplace. Visit