If you’re deciding to sell a business, there are a number of questions that you need to consider. Seller financing is the most important one that you should be answering “yes” to after reviewing all the advantages.
Greater Chance of Selling Your Business
When you agree to terms, a business has a greater likelihood of selling than in an all-cash scenario.
- A buyer can purchase with limited funds when a business for sale is offered with terms. Although, a few buyers may have the required funds, there are many more out there that can afford to put 30 to 40 percent down on a business.
- Buyers are often wary of a business that requires all cash. The thought is that the business has some problems that the owner doesn’t want to disclose until they have the money and can disappear. Therefore, offering terms not only opens up the opportunity to buyers with few liquid funds, it also assures the buyer that you have confidence in the business’ ability to succeed.
- In our culture, we’ve been brought up on using terms when making any type of major purchase such as buying a business. Since institutional financing is not usually available, the only way for a buyer to do so on terms is for you to carry the financing.
Let’s consider that a buyer has $100,000 down to invest. They have the choice of buying a $100,000 business for all cash or a $300,000 business with a $100,000 down payment. Assuming that the $300,000 business makes three times the profit that the $100,000 business does, the decision to choose the latter should be obvious.
Higher Net Profit
Business owners that sell with accepted terms over all cash receive a higher net profit. For example, suppose you had business owners one year who sold accepting terms receive an average of 81.6 percent of their asking price compared to 68.4 percent of those who did for all cash. When applied to a business with a $150,000 asking price, that 13.2 percent difference amounts to $19,800.
Tax Advantages through Financing
Sellers often gain tax advantages by providing seller financing. Capital gains taxes can eat up a lot of the profit some sellers might reap when selling their business. These taxes can be greatly reduced by having the seller carry the financing. Be sure to talk with a tax professional to determine what advantages specifically that you would have.