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Should You Consider Owner Financing?

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Bay Area Business Broker

Should You Consider Owner Financing?

As I approach sellers with prospective buyers, the issue of self-financing some of the deal frequently comes up. And for most owners, the initial answer is “no.” And I get it. After all, the whole point of selling the business is to retire, get out of the day-to-day of owning a business, and enjoy the proceeds from your hard work. Here’s why I advise sellers to consider accepting at least some seller financing– and why many of them do.

Seller financing is sometimes part of the deal for buyers using SBA financing. Sellers occasionally hold a note around 5% of the loan amount) to help buyers make sure they can meet the downpayment requirements of the SBA. 

However, seller financing also makes sense when owners realize the tax implications of selling. One thing that changes sellers’ minds is the tax burden they face if they receive a lump sum payment for their business. Holding a note over 3- 5 years allows them to spread out their earnings and mitigate their taxable income. They also appreciate having a predictable source of income they can plan around over the next few years. 

Seller financing also allows buyers to extend themselves to offer a higher price for the business. Seller notes, typically negotiated at interest rates of 5-8%, offer buyers a cost-effective financing option. This is particularly beneficial in today’s market, where traditional lending rates have increased significantly, making seller financing a more appealing and flexible alternative. These notes can be structured with terms of 3-5 years, often including a balloon payment. Additionally, creative financing structures can be tailored to meet the needs of both parties.

Sales agreements can be written to include personal guarantees to offset seller risk. A contract could include a lien on a property or other assets that assures the seller that they won’t lose their investment if the owner or the business fails to meet projections.

Recent changes in SBA rules now allow a seller to remain in the company as a paid employee, executive, or consultant, which means sellers can advise and support the company and protect their interests. In addition to earning interest for the loan period, a seller may also be eligible to take “a second bite of the apple” if the company is sold after it grows and becomes more valuable.

Of course, any deal depends on finding the right fit between seller and buyer. The two parties have to get to know and trust each other to make things work. The seller has to believe that the new owner can succeed and grow the business – and trust them to uphold the terms of the deal. 

The market for successful companies is red hot right now, and opening up to the idea of owner financing can dramatically improve your ability to find the right buyer and close a deal more quickly.

If you are interested in exploring selling your company, a good first step is to get a complimentary and confidential opinion of value.  

 

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