As described by FitsSmallBusiness, seller financing is an arrangement in which the seller of a small business agrees to accept installment payments directly from the buyer rather than having the purchaser obtain a loan from a bank.
Also termed “owner financing,” “owner-carried financing,” “owner carryback” and “owner will carry (OWC),” this option comes into play if traditional financing is unavailable and the buyer and seller still want to proceed privately with the sale.
It’s a financing method that been used successfully for years in selling homes and land as well as businesses. If contemplating the sale of your operation due to impending retirement or other reasons, is seller financing a viable option for you? Take a minute or two here to review its pros and cons:
The advantages of seller financing
With this method, you might:
- Find a buyer sooner rather than with other methods. Why? Through seller financing, you’ll expand your pool of purchase candidates.
- Close an otherwise difficult deal. Your seller-financing flexibility may be the “sweetener” that pushes you to the top in a buyer’s market. And, that’s no small consideration as some are predicting a “silver tsunami” of businesses about to be put up for sale by their baby boomer owners. Per Fast Company, over the next 20 years retiring business owners will sell or bequeath $10 trillion worth of assets held in more than 12 million privately owned businesses. This data per the California Association of Business Brokers.
- Inspire greater confidence in the buyer. Seller financing means the current owner is committed to helping the new owner learn the business and ensure the buyer’s success. The seller has “skin” in the game!
- Command a higher sales price. Remember, there will be no banker who carefully scrutinizes the deal!
- Negotiate a favorable interest rate, opportune financing terms, and other mutually acceptable conditions — including a large, “balloon” payment at a specified later date. The deal you make is the custom deal you create!
- Enjoy a stream of regular payments. Monthly or quarterly income derived from seller-financing becomes much like a pension or an annuity.
- Pay lower taxes on smaller payments received over time in comparison to a larger lump-sum gained all at once.
- Complete the sale faster. Seller financing is likely to be much less complex and time-consuming than if a buyer has to gain financing approval from a bank.
The disadvantages of seller financing
For all its “pluses,” this method of financing is not for all. With it, you will or might:
- Forego your large, lump-sum payoff. So, you’re out of luck if you hoped to apply a windfall it to a dream retirement home, pay for your grandchildren’s college educations, or make some other major purchase after selling your long-time business. However, you can usually expect a sizable down payment of 10-25%.
- Encounter potential hassles in collecting your periodic payments. Obviously, not all new owners are successful or responsible.
- Re-engage with the business the buyer defaults on the loan. Some sell via owner financing and move away only to find that they once again become the owner of a company they thought they sold! Of course, you’ll keep the down payment (as mentioned above) but the business will likely have a lower value than when originally sold.
A final piece of advice?
Whether selling or buying, conduct your own research regarding all financing options. As explored above, each is likely to have its own plusses and minuses for you to consider.