The Pros and Cons of Seller Financing When Selling Your Business

When selling a business, deciding to help the buyer by providing financing, also known as a “seller carry”, has been frowned upon by uneducated sellers. Providing this financing option for your buyer can be a great benefit for you both. But like any financing, it has its risks along with its rewards.

Pros To Providing Financing for the Buyer

1. Attract More Buyers: by offering seller financing, a business owner can attract a larger pool of potential buyers. This is especially true in situations where traditional financing options are limited or unavailable to buyers. Per the Federal Reserve’s Small Business Credit Report, only 48% of small businesses have their financing needs met. Sixty (60) to ninety (90) percent of businesses for sale provide seller financing. A large percentage of buyers may overlook your business if seller financing is not an option.
2. Higher Sales Price: With seller financing, a business owner can often sell their business for a higher price. This is because buyers are willing to pay a premium for the convenience and flexibility of seller financing. This is typically more than 15% higher than if a cash only sale.
3. Steady Stream of Income: With seller financing, a business owner can earn interest on the loan they provide to the buyer, which can provide a steady stream of income over time.
4. Tax Benefits: Depending on how the seller carry is structured, there may be tax benefits for the business owner. For example, the business owner may be able to defer some of the taxes on the sale proceeds.
5. Faster Sale: With seller financing, you won’t have to wait for a bank loan officer, underwriter, or legal department to process and approve the application. This ensures a quicker closing process compared to traditional loans.
6. Cheaper Closing Costs for the Buyer: Since a bank isn’t involved in a seller-financed sale, there are fewer fees and no appraisal costs. In fact, your buyer can avoid a whole scope of other costs that traditional lenders typically charge. Which means the buyer will have a better ROI on the investment they are about to make, making buying your business more attractive.
7. Easier Financing: While not every buyer can get approved for a loan, owner-financing deals are a good option if they have a hard time qualifying for traditional financing. However, that doesn’t mean you shouldn’t run a credit check on your buyer and determine if you should provide financing.
8. Reduced Risk: By providing financing to the buyer, the business owner has an option to reduce their risk of default or non-payment. This is because the business owner can retain ownership of the business or property if the buyer fails to make payments.
9. Owner Confidence: When a small business owner is willing to provide partial financing for the sale of their business, it’s often a sign that they’re confident the business will generate enough profit that the buyer can comfortably pay back the loan.

Cons To Providing Financing for the Buyer

1. Default On Loan: The buyer could default on the loan, leaving the seller with the unpaid balance. In this case, the seller may need to pursue legal action to recover their money.
2. Interest Rate Risk: The seller may agree to a lower interest rate than they would have received from a traditional investment, which may result in lower returns on your investment.
3. Payment Risk: The buyer may struggle to make payments on time, causing financial strain for the seller and ties you to the ongoing performance of the business.
4. Tax Implications: The seller may face tax implications from the sale of their business, which may be different from a traditional sale.
5. Less Up-Front Payout: Although seller financing your small business sale often results in a higher overall payout, you’ll receive less cash at closing.

Providing seller financing is definitely something to weigh the pros and cons based on your long-term goals. Make sure you consult with your legal and financial advisors to ensure you know the risks of before offering seller financing to potential buyers.

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