Benefits of Seller Finance when selling your business
Seller finance that will enable a transaction to close between a business owner and
a buyer in today's economy has become a very important consideration in most business transactions; especially for privately held companies. It's become important not only because the banks have reduced their amount of lending but also because the banks are now reluctant to loan as much of the purchase price. For example, if the buyer brought a down payment of 20 per cent the bank was willing to lend the remaining 80 per cent.So the good old days are now behind us with the banks now preferring the buyer to bring a down payment of 20 per cent, the seller to carry a note of 20 per cent and the banks will then fund 60 per cent as long as the seller moves into second position.
This change of dynamics is making it difficult for sellers to decide if they really want to sell. Many sellers are reluctant to carry a note because they are worried the buyer will not make that payment to them or the conditions of the loan may mean the seller does not start to get paid until 3 or 4 years after the transaction closes escrow.
There are down sides to seller finance but there are many upsides. Let's have a look at a few of them.
One of the main benefits to the seller agreeing to carry seller finance is that it delays the payment of taxes. Selling a business at the close of escrow triggers a taxable event. However, the tax is only due and payable when the seller receives the money. For example, if the seller carries a note on $100,000 of the purchase price and the note is repaid at $20,000 per year for five years then the tax due is not paid until the seller receives the money each year. And the rate of tax is based on the applicable tax rate in that year; not the rate the seller paid when the business closed escrow.
A further benefit to the seller from seller finance is that the note provides a steady stream of income in the form of an annuity. For many sellers this is attractive as they may be moving to their next venture and are yet to create a new steady stream of income.
Another benefit of seller finance is that it encourages the buyer that the seller believes in the business and all the disclosures that have been made and that the buyer has the ability to run the business effectively. This morale boost can be important to buyers as they work through their decision making process.
In addition to the above, seller finance will generally pay interest on the seller note at a much higher rate that the seller can get by investing the money in a CD or some other form of interest bearing account.
When you bring all the above ideas together there is a compelling reason for the seller to fully understand Seller finance and how it would benefit the sale of a business. In some cases, a seller may choose to get a sizeable down payment from a qualified buyer and then carry a note for the rest of the purchase price. Of course, if a seller was comfortable with this situation it would enable the deal to close escrow much quicker as the buyer does not need to apply to a third party lender for finance which can often be a 6 to 12 week process; if the loan request is approved. At the moment, knowing a third party lender will approve a loan request is one of the biggest drawbacks affecting the closing of many business transactions.
Benefits of Seller Finance when selling your business
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