Selling your business through seller financing

Planning a business exit during COVID-19 is difficult and many who had been eyeing a sale may have long ago shelved their plans in order to wait for the market to recover.

However, if you’re intent on selling your business and not inclined to wait out the crisis, then you want to both maximise your chances of a successful sale, while minimising your exposure to risk.

One way to broaden the pool of potential buyers for your business is to offer seller financing. This of course comes with significant risks, but it can certainly attract greater levels of interest in your business and, if used correctly, can be an excellent exit strategy.

What is seller financing?

Through seller financing, you as the business seller provide a form of loan to a buyer in order to facilitate a sale. The financing comes with legally-binding terms and typically involves the buyer making a down payment, followed by monthly repayments at a specified interest rate over a set timeframe following the takeover.

Once the repayment terms are fulfilled, the transaction is complete and the seller now owns the business fully.

Minimising the risks

It goes without saying that selling a business in this way comes with considerable risks. After all, as opposed to a regular sale where the money is handed over and you walk away, with seller financing you’re still tied into the business.

As a result, if the new owner fails and the business goes into distress or even collapses, you could be the one to lose out.

Therefore, fully assessing each potential buyer to ensure you select the right one is absolutely key. Conducting thorough due diligence on each suitor, looking in particular at their experience in your industry, their financial history and their plan for the business, will be invaluable in mitigating your risk exposure.

In order to aid you in this and in the rest of the sales process, hiring a professional adviser that you fully trust to provide legal and financial guidance is an absolute must. An advisor can help you in terms of conducting due diligence and in getting the seller financing terms that work for you.

Other ways to minimise the financial risk you are taking include charging a higher down payment and a higher interest rate, along with potentially shorter payment terms, in order to reduce the timescale of payment.

The benefits of seller financing

Firstly, offering seller financing will open a far wider pool of potential buyers, can help you attract more interest and, ultimately, increases your chances of selling your business (especially at an uncertain time like this.)

As a result, you may be able to attract that elusive “right buyer”, aka, someone particularly suited to taking on your business but that otherwise may not have had the money or been able to access the financing from a bank.

Choosing the right buyer might not sound too important if you just want to sell up and sail off into the sunset, but, when using seller financing, choosing a buyer who is more likely to make a success of your business post-sale can be crucial.

Seller financing can lead to an easier sales process. While you’ll want to be even more careful than usual about due diligence, the availability of seller financing can make the process less pressurised and, due to the absence of a mortgage or lending provider such as a bank, can be quicker too.

Furthermore, while you will only receive a fraction of your business’ value up front, seller financing can in fact secure a higher price in the long term. For one, there’s the interest rate charged on the monthly payments, which will provide a steady stream of cash as opposed to just receiving a lump sum.

Secondly, the long-term nature of the payment means that there could be fewer tax implications for the sum you receive than if you got it all in one go. Finally, the presence of seller financing can make your potential buyer more likely to agree to a fee close to or at your asking price.