Potential problems that Business Sellers Encounter when Seller Financing
Financing a business purchase is often a hard task for potential business buyers. If you are thinking about selling your business in today’s market, seller financing will definitely make your business more appealing to potential investors and buyers. But just like any deal, there are issues that sellers will likely encounter in seller financing.
The Down Payment
If you are thinking about selling your business, then it is crucial that you are aware of the competition in the market. A lot of sellers don’t know the statistics that there are thousands of businesses today that are given up for sale anytime. With the rise of modern technology and the Internet, most buyers today review their choices online before they come up with a decision. Therefore, it is crucial to note what a certain buyer can locate in the competitive market.
Today, it is common for buyers to end up with a 20 percent down payment. If you are considering seller financing, try to be conservative with your down payment. In most cases, it is common to have one times on annually earnings to 50 percent of the total purchase price. If you are still confused about deciding on the figures, sit down with a business broker while discovering this number.
The Interest Rates
When it comes to seller financing, the interest rate can be a number that both parties have agreed to. However, a good perspective that you need to remember when it comes to interest rates is to remember that you are neither a bank nor a financial institution. Based on the Wall Street Prime, interest rates for seller financing should be around 5% to 10%. There are sellers who still want to do the more traditional bank approach when it comes to interest rates.
Term of the Note
This also refers to the length of time a buyer has to pay off the loan. There are a number of ways for you to determine the term of the note. When selling a business, both parties want their money to be reinvested back into a growing company rather than taking it out and weakening its ability to pay. If you want to have win-win situation, it is recommended that you have the loan amortized for ten years.
Depending on the kind of business you own, it could be necessary for you to offer varied pay schedules to account business specific variables. For instance, if you have a seasonal company such as an HVAC firm, it would be reasonable to have higher due payments in the summer than in winter. Allow the buyer to get into their feet before making the payments. Give them at most three months before their first payment is due. This can help the new owner ‘settle in’ and work with the added expenses incurred after the purchase.
These are just some of the issues that you will encounter in seller financing. It would be wise to find a business broker to help you land in a more profitable deal.
Have a question for Scot? Ask or leave a comment below!