Written by Harvey Weyman-Jones, Weyman Jones Business Brokers & Valuers.
There is a reluctance of many Sellers to put their business up for sale in these economic times. They are concerned that they won’t be able to get the price they would have in years past. They are also worried that they won’t be able to earn a good return on their sale proceeds. Also another concern, which is always there whatever the economic cycle, is the fear of “what do I do after the sale?” and “there is only so much golf that I can play!”
Owners of quality businesses should not be afraid to sell in this market. Reliably performing businesses will impress Buyers who are getting frustrated with what is generally on offer now.
SELLER FINANCE - a win/win for all
One way of maximising the sale price is to offer some Seller finance. The USA has always been happy with this concept. It is customary for business owners to work their way out of their business and carry some risk in the future.
Australian business owners have always demanded full cash and have been quick to disappear into the sunset once the sale has settled. Perhaps now is the time to consider ‘Seller finance’ for the reliably performing businesses. Sellers can take the place of the banks when it comes to lending against the business assets. The banks will continue to provide funds against real estate.
WHY SHOULD SELLERS FINANCE THE SALE?
Financing the purchase of a business with current cautious lenders can be frustrating for obvious reasons. What better situation than to deal with the Seller who is confident of the performance of their business.
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If the Seller is confident that the business can pay off the loan and provide a satisfactory livelihood to the Buyer, then the Buyer will have the confidence to buy.
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The Seller should keep involved with the business as a paid, part-time consultant. This will give the Seller an opportunity to protect the loan and earn future income. It will also reduce the risk to the Buyer by having the Seller available for consultation to continue relationships with key suppliers, staff and customers in the short term with a gradual slide out in the long term.
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Sellers will usually receive a higher price if they finance the deal due to the perceived reduced risk to the Buyer.
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Interest earned on Seller finance will be greater than if placed on deposit.
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Interest adds up 8% interest over 9 years will double the principal.
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Seller financing may have significant tax advantages.
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Sellers should calculate what they need in cash from the sale and be prepared to lend the balance.
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Sellers should lend against the tangible assets in the business, e.g. up to 30% of the sale price if covered by the value of the plant, equipment and stock.
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The term of the loan needs to allow the Buyer to comfortably pay back the principal and interest without impacting on the performance of the business, say 5 - 10 years.
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Seller finance is not suitable for ‘Buy a Job’ businesses.
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Seller finance should provide a ‘win/win’ situation for both parties as long as the business continues to trade profitably.
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Sellers can slide out of the business gracefully, which can be a big issue for those Sellers that find it hard to give up abruptly.
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Sellers can take pride in mentoring the new owner and assisting in the future growth of their ‘baby’.
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