In this presentation we will discuss seller financing, which is when the seller of a business provides a loan to the new buyer to cover a portion of the purchase price. After reading this article you should understand why seller financing is so frequent, the typical terms of seller financing, and what protections most seller financed deals include. - See more at: http://fitsmallbusiness.com/seller-financing/

2. How Frequent is seller financing?

3. The largest online
marketplace for selling
businesses, BizBuySell
Regularly surveys business brokers
about topics like prices and financing. In
the most recent survey they reported:
When asked about their sales, 26 percent
of brokers said nearly all (90 to 100%)
of their closed sales include seller
financing while another 32% noted that
most (60 to 89%) included it.

4. Why is seller financing
So popular?

5. Banks do not like to
finance the purchase of
small businesses
Banks have two basic requirements when
they make a loan:
!
1. Confidence in the borrower’s ability to
repay the loan.
2. Collateral to sell, if the borrower does
not or cannot pay back the loan.

6. Unfortunately, there are problems
meeting both of these conditions when it
comes to financing the sale of a small
business. By small Business, I mean
those which are being sold for less than
$2 million.

7. What prevents
bank financing?

8. What prevents bank financing?
1. The new owner’s lack of experience in
running the business.
2. IRS tax returns show poor financial
numbers.
3. The business does not count as
quality collateral.

9. 1.
Let’s say that a business being sold
is financially healthy. On paper, it
looks like the business should be
able to support payments. However,
the past performance of the
business is based on having an
experienced owner.

10. 1.
The new owner may not have
that experience. In short, the
management change makes
banks reluctant to count on the
business’s past performance.

11. 2.
Banks rely heavily on IRS tax
returns in assessing the financial
health of a business. However,
small businesses often try to
minimize the amount of profits that
they report to IRS. It’s widely
known that many small businesses
which take cash payments don’t
report all of their sales.

12. 2.
An existing business owner may
claim that a business is generating
lots of profits when you include
unreported income, but these
claims mean nothing to a bank
which is looking at the IRS returns.

13. 3.
Lastly, there is the issue of collateral.
Borrowing to buy a house is very
different than buying a business. If a
person is not able to make payments on
their house, it generally doesn’t impact
the resale value. The bank should be
able to get back all the money by selling
the collateral.

14. 3.
With a small business, the business is
generally not doing well if the
business owner cannot make
payments. As a result, the bank will
probably have to accept a very low
resale value in comparison the
original sale price. The business
itself does not make good collateral.

15. Franchises
The Exception to The Rule

16. New business owners are often able to get financing
For the purchase of a franchise. Franchises are seen by banks as
having less risk, particularly management risk. Those with no
previous experience running a business, typically apply for a bank
loan with an SBA guarantee.

17. What percentage of the sale
amount is typically seller financed?

18. 60 – 70% of the sale’s
amount is typically
owner financed
For a business which is sold for
$500,000, a typical deal might
include $300,000 in owner financing
and a $200,000 down payment from
the buyer. However, there are no hard
and fast rules for seller financing.

19. What are the typical terms for owner financing?

20. 5 – 7 years and 6 % –
10% Interest Rates
The terms of the loan had as much to
do with the buyer’s ability to make
payments, as they did with market
rates. While the seller wants to make
the most possible money from the
sale of the business and related
loan, they also did not want
the buyer to default because
of unrealistic debt payments.

21. What protections do seller’s try to demand in exchange for financing?

22. What protections do
seller’s try to demand in
exchange for financing?
1. Control of the business,
if there is non-payment.
2. Real Estate as collateral.
3. A personal guarantee.

23. Business Brokers see
terms which give
the seller
The right to take back control of the
business within 30 or 60 days of missing
payment. By the time the old owner takes
back control, customers can be permanently
lost and supplier relationships broken.

24. For businesses whose
operate with a substantial
amount of inventory
There are sometimes clauses which require
the new business owner to keep inventories
at certain levels. In the case where the
seller resumes control, they will at least
not need to have to make a large
expenditure on inventory.

25. Real Estate as collateral
There are several problems with this
type of collateral. One, there is often a
mortgage on the house. The bank
holding a mortgage on the house has
the first claim to the house.

26. Real Estate as collateral
Second, there may not be much owner
equity in the house after the mortgage
is deducted. While the house could be
sold even if the business collapses,
that doesn’t mean there will be much
money gained.

27. Do deals with owner financing
command a higher price tag?

28. Tom West of the Business Brokerage Press suggested
In deals where the business might attract
a number of potential buyers, owner
financing increased the sale value of the
business by 10 to 15%. However, owner
financing wasn’t really about obtaining a
better price but being able to close deals.

29. What legal and professional help should one get with seller financing?

30. In many transactions,
there is a business
broker involved
However, buyers should remember
that the business broker works on
behalf of the seller. Often buyers
and sellers involve their lawyers
and accountants.

31. In many transactions,
there is a business
broker involved
Typically, there are several legal
agreement that need to be drafted
and signed including a Purchase
Agreement, A Promissory Note,
and a Securities Agreement .

32. A Word of Caution From Josh Patrick

33. Mr. Patrick strongly
believes that when the
seller finances the sale
There is a high probability that the
buyer will at some point decide to
stop paying. Because of the risks of
seller financing, Josh advises sellers
always try to get paid in cash, even it
means taking significantly less money.

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