Why is Seller Financing Important?

Why is Seller Financing Important?

Posted on July 10, 2018
Some sellers don’t really want to sell.  Others can’t accept what the sale is going to generate toward personal wealth.  Still, some sellers just won’t accept the reality of having to hold a note of 5-10% of the business sale price.  Those are the 3 biggest reasons business owners don’t or won’t sell.  
 
Even sellers that eventually accept the likelihood of seller-financing will ask why seller financing is so important.  “Aren’t there any buyers with the money to make the deal”?  “I knew someone else that sold a business and didn’t have to hold a note”.  “I asked my banker and he/she said seller-financing is not necessary”.  “Why can’t you find a buyer that has the money”?
 
It might be helpful to read the article, Financing a Business, on the IEB website blog.  The article details the challenges banks have with valuing businesses, assessing a buyer’s acumen for directing a business and, most importantly, how banks collateralize their interests.  Seller-financing is really the product of financing institutions desire to ensure the seller has something at stake.
 
To summarize, banks want the seller to have something at stake when financing the transaction.  Sellers with an interest in the ongoing success of the business are much more likely to respond to the new owner of the business when called for help.  The help a new buyer requests is frequently as simple as the seller taking a 30-minute phone call.  The most demanding requests required no more than a half-day visit to the business by the seller.  Seller-financed businesses have an 80% greater likelihood of succeeding than businesses with no seller-financing.  
 
Many business owners are still reluctant and will only seller-finance when they think they absolutely have to finance part of the sale.  Some sellers are so stubborn they won’t finance even if there were more sale proceeds up-front to be realized.  On one recent valuation, the business was valued at $970,000.  The seller was told to expect $870-910,000 on the day of the sale and finance the remaining $60-100,000 of the sale price.  More than one buyer offered to pay around $900,000 on the day of the sale with $60-70,000 in seller-financing.  The seller would not finance any part of it.  The seller actually accepted an offer of $905,000 with no seller-financing.  That seller left up to $65,000 on the table!!  It begs the question of why anyone wouldn’t have accepted one of the offers of approximately $900,000 with payments to be made into the future.  Who wouldn’t want an annuity coming in for years?  
 
To many business owners who have not looked into selling the business until the day they wish they’ve already retired, the idea of any seller-financing is a shock.  It behooves of every seller to start valuing the business early so when the time comes to sell they are better prepared.  
 
 

Tom Stayanoff is a Senior Broker with Indiana Equity Brokers and specializes in serving small and medium-sized businesses in Northern Indiana.