World Class Mergers & Acquisitions  |  For Companies $5 Million to $250 Million in Revenue

Role & Importance of Seller Financing

Almost without exception, all business sellers would prefer to get 100% of their selling price in cash at closing – and for some very good reasons.  Most sellers have heard horror stories about other sellers who sold their business for little or no cash down, and carried a seller’s note for almost the entire purchase price, and lived to regret it.

Nonetheless, I generally coach my selling clients that they should be prepared to take back a least a small seller’s note – perhaps for only 10% of the selling price – if the need arises.   In today’s extremely tight credit market, sellers should probably be prepared to carry even more of the financing.

Often when the seller insists on getting 100% cash at closing, the buyer, his banker and other advisors, begin to suspect that perhaps the seller knows something is about to go wrong with the business, and is eager to get as far away as possible.  One study focused on the impact zero seller financing has on selling price, and concluded that businesses which sold with zero seller financing, sold for as much as 40% and 60% less than comparable businesses.

Studies have shown that 70% of all business sales include some element of seller financing.  This is particularly true of smaller businesses.  One study concluded that in over half of all businesses sold, the seller financed over 50% of the selling price.  Some businesses which are particularly difficult to “bank,” such as construction contractors, may be almost unsalable without significant seller financing.

Another benefit of taking even a small seller’s note and treating the transaction as an installment sale for tax purposes is that it may reduce the seller’s total tax burden.

If you know of a business owner who’s thinking of selling and who might benefit from a complimentary consultation, have them contact me, or any of the M&A professionals at The Bradway Group.

By: Mike Ertel, Transworld M&A Advisors