Why you need seller financing to buy your next business
If your broker is telling you that seller financing isn’t an option to buy an existing business that you like, I recommend you test that with the seller of the business personally.
What is seller financing?
It’s when the seller of a business acts as your bank. More often than not, when somebody is selling their business, they expect to lend you up to 50% of the business value in the form of a note, carrying interest and being paid off through the cash-flows of the business over a period of five to seven years after the purchase of the business.
In his blog, business broker guru Richard Parker explains:
While the terms can vary including interest rates, length and percentage of the total deal being financed, a general rule is for the seller to carry thirty to fifty percent at current interest rates plus a few percentage points over three to seven years.
The dilemma for many buyers however is never getting to the point of presenting sellers with an offer because they are often stonewalled by brokers or the seller’s legal/financial representative, or family members trying to dissuade them from carrying a note.
I can certainly understand a seller’s trepidation, but the reality is that if they truly want to sell their business, they have to participate in the financing. End of story. Otherwise, their business will be another one that remains on the market forever.
–Richard Parker, author of How to Buy a Good Business at a Great Price
How common is seller financing?
Most sellers start out cold on the idea of seller financing because of the risk involved for them when it comes to the buyer actually paying them back for the loan, but it’s a great move for everybody involved when you consider the fact that this tool helps the seller attract potential buyers, and may even help the seller achieve a higher final price for his or her business. Seller financing can also help lead to a faster closing, which increases the probability of a transaction successfully closing.
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