Overview of Seller Financing
 |
 |
Question:
Can you explain how Seller Financing is typically handled in a deal? I'm in negotiations to buy a business now, and I want to make sure this is included -- but I'm not sure how much to ask for or what terms.
Answer:
You raise a very good point. While there are no hard set rules regarding seller financing as a percentage of a deal, one thing is clear: it's a critical component to any deal. First, it serves to validate all of the representations and claims that a seller may make about the viability of his/her business. Second, it's far easier to arrange seller financing than it is to obtain bank or SBA backed financing. Third, it's an accepted practice. Lastly, it will allow you to leverage your cash down payment.
Having said this, my recommendation is that you target your offer to include 40-60% of the deal as seller financing. In today-s market, the interest rate should be around 6 - 8%. More important than the rate is the amortization schedule. The longer you can negotiate to payoff the loan, the easier it will be on the business. As such, you're better off to give in to a higher rate, in exchange for a lengthier period. As a barometer, 5 - 7 years should be your target, at least in the initial offer.
Here are some of the additional terms you may want to offer:
- Retain the right to payoff the loan early without penalty.
- Make lump sum payments towards the principal once per year.
- There should be no payments for the first 90 days after closing.
- The first year should be principal payments only.
As a last point, after you own the business for a while if you have excess cash, you may want to consider offering the seller a discounted price to pay off the entire loan. In this case, you should get at least a 20% discount on any outstanding balance. If the business is doing well, call the seller and offer to pay off the whole note. Chances are you'll hear them starting their car during the conversation.
Download expert tips, and proven strategies covering the entire buying process. Learn how find and buy the right business and negotiate a great price. Click here.
Download a 200-Point Due Diligence Checklist & Strategy Guide. Learn everything about any business before you buy. Click here
| Get more expert advice in Richard Parker's How To Buy A Good Business At A
Great Price - the most widely used reference
resource and strategy guide for buying a business. "I highly recommend this course to anyone even thinking about buying a business." - Dylan Garland President, BizQuest |
|
|
|
Richard Parker author of: How To Buy A Good Business At A Great Price(TM), the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center. Richard Parker is also the author of BizQuest's Business for Sale Blog |