Historically, seller financing has been used to bridge the gap between the purchase price and a buyer’s down payment and bank loan. In today’s environment where bank debt is very difficult to obtain, especially where real estate is not involved, seller financing is often essential in getting a business sold.
For buyers, the advantages of seller financing are fairly clear:
- Often the seller is the only source of financing; banks are generally reluctant to finance small businesses with few tangible assets.
- A buyer gains the confidence to purchase the business from a seller’s demonstrating faith in the strength of the business and in the buyer’s ability to successfully operate the business.
- A buyer retains the services, however informally, available from the seller to insure the business’ on-going success; the seller wants to be sure he/she will be paid.
- A buyer may just pay for historical performance at closing, and through a price adjustment (an earnout) only pay for anticipated future performance when it occurs.
For sellers, who usually don’t want to be bankers, there are also advantages:
- A sale may happen that would be impossible without seller financing.
- The sale price will likely be higher.
- With today’s very low interest rates available on bonds and CDs, the rates available from seller financing can add significantly to a seller’s total proceeds. Rates of 5% to 8% are not uncommon on seller-financed notes compared to 0% to 2% from bonds and CDs.
- With an earnout provision, a seller may obtain both today’s value for the business and some upside from future growth.
Seller financing can benefit both buyer and seller in a transaction, but the bottom line is that both sides must have confidence that the other can hold up its end of the bargain.