The use of seller finance to facilitate the buying and selling of a business naturally involves two parties – the buyer and the seller. As such, both parties have to be satisfied with the arrangement and be as sure as they can that the advantages to them of such a procedure outweigh the disadvantages.
However, what may be good for the seller may not be so good for the buyer, and vice versa, so it is necessary to look at the deal from both sides of the fence.
Advantages to the seller
By offering seller finance, the seller can dispose of the business quickly and move on to fresh pastures. Furthermore, experience shows that those who offer seller finance obtain a better price for their business than those who don’t.
The seller also gains by being able to charge interest on the loan and could also benefit from an advantageous taxation angle, as the financial gain is spread out over a longer period and may not be subject to one single large tax deduction.
Disadvantages to the seller
On the minus side, the seller always lives in fear that the buyer may default, or that they lack the business acumen to run the business successfully, running it down to a point where they cannot repay the loan and the business is difficult to turn around in the event of a foreclosure.
In other words, the seller has to maintain an ongoing connection, whether wanted or not, and retains risks while losing control. To guard against such possibilities, the seller needs to hold some kind of security, although they may find that a bank already has first claim on the buyer’s property or other valuable assets.
Finally, there is the long-term cost of the transaction. By loaning the buyer money to purchase the business, the seller may be unable to take advantage of a more profitable venture that appears elsewhere.
Advantages to the buyer
Aside from the obvious fact that seller financing can get a buyer into business if the banks refuse to advance the money, the fact that the seller is willing to loan money to enable the purchase indicates that the seller has confidence in the future fortunes of the business.
In addition, seller financing speeds up the purchasing process, allowing the buyer to get started sooner than would otherwise be the case, while the seller, who remains connected to the business and interested in its well being, is available for advice and guidance.
Furthermore, if the seller is desperate to offload their business, it may be possible to negotiate not only a very favourable price, but also better terms and conditions than would be available under normal circumstances.
Disadvantages to the buyer
In comparison to borrowing from a bank or paying cash up front, buyers often pay a higher price over a longer period of time with seller financing.
As with any sale, the buyer also needs to check the reasons for the sale and be 100 per cent satisfied with them, as the seller may only be offering seller finance to shift a bad business. The same applies if the price appears to be too much of a bargain.
Lastly, when opting for seller finance, the buyer may have to put up a larger deposit than they would like because of the default risk, and even then will possibly have to put up some collateral, such as their home.
This article was contributed by BusinessesForSale.com, the market-leading directory of business opportunities from online media group Dynamis.