How to Sell a Small Business

Seller Financing When Selling a Business

Selling a business? Seller financing may be the only way to get a business-for-sale transaction done these days. We take a look at the pros and cons of offering seller financing in your exit strategy.

When times are tough, it's time to get creative.

Seller Financing When Selling a Business

That is especially true if you are ready to sell a business you've spent a lifetime building.

Nothing may be tougher right now then getting traditional bank financing to help a prospective owner buy your business. It may pay, then, for the seller to get creative and offer something that may sound risky: financing.

Seller financing offers advantages worth considering.

  • 1. It can generate more money.
  • 2. It increases the odds you will sell the business.
  • 3. You collect interest on the sale.
  • 4. Odds of a successful transaction improve since buyers typically invest their own capital, ensuring motivation to make the business work.
  • 5. The buyer can benefit as your lending standards probably won't be as stringent as a bank's standards. Of course, that does not mean you should have lax lending standards.
  • 6. You may get more interested buyers., a popular site that list business for sale, allows buyers to search only for deals that offer seller financing. They report a significant uptick in buyers looking for seller-financed businesses for sale.

In a recent blog post on selling a business with seller financing at Biz Broker Journal, Domenic Rinaldi, managing partner of Chicagoland Sunbelt, explains why more sellers are weighing the benefits of offering financing.

"There was a time when banks played a minor role, if any, in small business acquisition lending," Rinaldi writes. "So, we now see the market retraining itself on the practice of 'seller financing.' In essence, the seller fulfills the role the banks have played, and in the process, gains back control of their goals. For obvious reasons, this form of financing is met with trepidation by sellers."

Clearly, there are risks for the sellers in this type of deal.

The success of the deal will hinge on the future success of the business. You may be stepping away from management but, by acting as the lender, you retain a stake in the business. You may want to offer your services as an advisor, at least initially, to make sure the new owner's transition with customers, employees and vendors runs smoothly.

Just as the buyer conducts due diligence on the business he wants to buy, the seller needs to do his homework regarding the buyer. Has the buyer run a business before? Is a career employee recently downsized? Why does the buyer want your business? Does the buyer have a good credit history?

Understanding the motivations behind a purchase will help you, as the seller and banker, to reach a level of confidence in the buyer.

Obviously, this is complicated transaction that requires expertise.

You will want to work with an attorney on contract language. What happens if the buyer defaults? You may get the business back--if you would want it at that point--but such crucial details need to be spelled out.

To find the appropriate buyers, you may want to work with a business broker such as Rinaldi's Chicagoland Sunbelt. The International Business Brokers Assoc. also offers advice on what you should look for in a business broker, and you may also be able to find a good business broker using our national directory of business brokers.

As for interest, you will likely charge roughly the same rate as a bank for a small interest loan.

With permission, you can check the buyer's credit record. If the buyer doesn't give you permission to check his or her credit score, then it's probably not likely you will want to offer the financing.

Keep in mind, however, that in today's banking climate, the only way to get a deal done may hinge on your willingness to provide financing.

It's time to get creative.

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