When it comes time to sell your very small business, you’ll need to consider how your future buyer will pay for the business. You may wish to consider offering seller financing for some or all of the purchase price.
What Is Seller Financing?
Seller financing is when a business seller offers the business buyer a loan to cover some or all of the business purchase cost. Seller financing can also be offered to cover the cost of inventory. With seller financing, the buyer will sign a promissory note for the loan. The note will provide details on the total amount borrowed, payment schedule, interest rate and payment terms. The note will also detail what to do in case of loan default.
What Are Some Advantages to Seller Financing?
- Seller financing means that your buyer does not have to go through the process of taking out a loan from a bank. Bank loans can be difficult to get, depending on the current lending climate. SBA loans take a very long time to get and require lots of documentation. Seller financing allows you to skip this part.
- Seller financing can widen the pool of potential buyers. By offering financing, you may attract buyers who would be a good fit for your business but do not have the cash on hand in order to complete the purchase on their own.
- Similarly, with financing, you might be able to get a little bit more money from your sales price. It is not uncommon for buyers to make a lowball offer on your business if they present a full cash offer.
What Are Some Disadvantages to Seller Financing?
- Your buyer could default on the loan. With any type of loan, there is always a risk of default. If you lend money to a buyer, you’ll need to determine what happens if he/she defaults on the loan. In many cases, loans are structured so default would mean the business reverts back to the seller.
- You won’t walk away and be completely done when the sale closes. You will continue to have some connection to the business until the loan is paid in full.
Seller financing is an import idea to consider as you get ready to list your very small business for sale. In our opinion, seller financing is helpful in closing deals, so long as the seller does her/his diligence on the buyer.
As always, if you’re considering selling your business, talk to us. We have experience with seller financing and have worked with it in deals on fitness businesses (especially Pilates and e-commerce businesses, Amazon FBA).
