Why Would Sellers Want To Finance a Deal & Carry Seller Financing?

Why Would Sellers Want To Finance a Deal & Offer Seller Financing? (5 Reasons Why)

By Russell Bowyer

There are a number of reasons why sellers will finance the deal, and sell their business using seller financing.

Seller financing only works with profitable businesses, and benefits business sellers who don’t want to wait for too long to sell their business, or if they are motivated to sell quickly. There are other advantages, and include tax savings, higher interest payments and protection of their legacy.

But before I explain what these are, let me dismiss the biggest held myth about seller financing first….

Most, if not all people who don’t know otherwise, think that it’s only business owners with loss-making businesses who will accept seller financing.

But this is simply not the case, and in any event, seller financing won’t work with a loss-making business.

Let me explain why…

For seller financing to work, the business needs to be making a profit, and it needs to be generating cash flows from those profits to afford the seller financing payments.

A loss making business won’t have the cash flows to pay the seller financing, which is why it doesn’t work.

Unless of course you intend to pay the seller financing yourself, which in my mind defeats the objective of buying an existing business, especially when it’s your first business you buy.

The ideal scenario is that the business can afford to pay for itself out of future cash flows, and to also have sufficient cash flow to pay you a salary that replaces your 9-5 wage too.

There’s no point in the seller trying to push you, as the buyer, into a position to repay the seller financing over a period the business simply can’t afford, otherwise the financing will fail, because the business will fail, and you will end-up defaulting on the agreement, and the seller won’t be paid in full.

This is no good for anyone.

For seller financing to work, as it should, the seller needs to work alongside you, as the buyer, to agree a repayment period, over which, the business can afford the payments.

The seller financing needs to be structured, so that you can safely borrow from the seller.

The deal needs to be such that you, as the buyer, have more than enough cash flow to easily pay the financing.

But the concept of using seller financing to buy a loss-making business is really a non-starter in any event.

Because how I see it, is you are very unlikely to pay much, if anything, for a business that’s making a loss, which means, there’s no need for seller financing in the first place.

But let’s assume you are prepared to pay the seller an amount for their loss-making business, this amount couldn’t be paid from the business, because the business won’t have the money and cash flows to pay it.

On the other hand, If you are looking to buy a profitable business, seller financing works, where certain sellers will finance all, or part of the deal.

So you may then ask, if the business isn’t making a loss, why would any seller agree to finance the deal of a profitable business, which for many, business sellers included, they don’t understand why anyone would accept this type of deal?

Reason #1; Business sellers are happy to finance the deal is the seller is realistic about selling their business in a buyer’s market

The first reason why a seller will finance the deal is because the business owner simply wants to sell, and they are being realistic about how “business buying and selling“ works.

They understand how there aren’t many business buyers like you who are looking to buy a business. Which means, for an owner to sell their business, they need to be flexible in their approach.

Otherwise the business may take a long time to sell, or their business may not sell at all.

And like the sale of property, the longer a business is on the market, the less likely the owner is going to receive full value for it.

Reason #2; Business sellers are happy to finance the deal if owner is a motivated seller

The second reason why sellers are happy to finance the deal, is similar to the first reason, but in this case the owner is motivated seller, and they need to sell quickly.

Why seller financing works well for business owners who are keen to sell quickly, is because seller financing is very quick to arrange (within a week), especially when it’s compared to bank lending.

Bank lending can take a long time to agree (upwards of 90 days or three months), with no guarantees it will be agreed either, as the bank requires certain criteria to be met, before they will lend.

Banks are also not very keen to offer acquisition financing in any event.

Why bank lending is notoriously difficult to arrange, is because banks always require an upfront deposit from you as the buyer.

But if you don’t have the necessary savings for the required deposit, a bank-lending-deal will never happen.

Banks also insist on collateral for the loan, they will also require the business, and you, to have good credit scores, the business also needs to pass the bank’s checks, and the business has to be in a sector the bank will lend to in the first place.

Whereas with seller financing, you are simply agreeing the deal directly with the seller. You are effectively writing your own loan agreement.

There aren’t the strict bank lending rules to follow, there are no “the computer says no” moments.

Which means that, so long as the business is profitable, and you can agree terms with the seller, so the deal is a win-win outcome, seller financing will work every time.

Whilst there are no strict bank lending rules to govern seller financing, the “seller-financing-payment-period” must be such that the business can afford the payments, otherwise the deal just won’t work.

But on the assumption the seller wants to be paid in full, and doesn’t want you, as the buyer, to run into cash flow problems down the road, because the repayment period is too short, they will normally accept a reasonable period for the seller financing to be paid.

Reason #3; Business sellers are happy to finance the deal to save tax

Another reason why business owners will agree to seller financing, is when they discover they can save tax, when the deal is structured correctly.

These tax savings are quite legitimately too, as you never want to be involved in tax evasion.

The tax savings I’m referring to, is when the initial deposit is paid from the business’s excess cash, instead of the seller taking a pre-sale dividend.

Most people hate paying tax, and most sellers will jump at the opportunity to save tax.

Once business owners realise that there are tax savings to be made, by receiving the excess cash as part of the proceeds of sale, instead of receiving it as a pre-sale dividend, most would agree to a deal of this nature.

You and the business owner must check if this applies in your tax jurisdiction, but this is does apply in the U.K. and in the USA, subject to certain conditions being met.

Reason #4; Business sellers are happy to finance the deal to protect their legacy and their employees

Another reason why sellers are happy to accept seller finance, is when the seller wants to sell to a buyer who they feel will look after their employees, and who will take care of their business and the brand they’ve take years to build.

Sometimes business owners would prefer to sell for less money, and to sell with seller financing, than to receive all the money upfront, if it means they avoid selling their business to a competitor, who may asset strip their company, destroy their brand and make a large number of their employees redundant.

For many business owners, it’s not always about the money, and if you, as a buyer, build a good rapport and trust with the owner, this is when the seller is much more likely to agree to a sale, even if the sale involves seller financing.

Reason #5; Business sellers are happy to finance the deal is to receive a higher interest

Another reason why seller financing is an advantage to the seller, is if they can negotiate interest payments too.

Interest on seller financing, can be part of the deal, and can be at higher rates than bank deposit rates.

If the owner were to receive the full amount upfront, they may put the funds into a bank deposit.

Bank deposits notoriously pay low rates of interest, but if the deal includes interest to be paid on the amount financed, the seller could receive more interest on their money, than if they received it all at once.

Conclusion why business sellers will finance the deal and carry seller financing

To conclude, seller financing only works with profitable businesses, and becomes beneficial to those sellers who don’t want to wait for too long to sell their business.

Seller financing is especially beneficial to motivated sellers who want to sell quickly.

Plus, on top of that, sellers can save tax too in certain situations, and they may receive more interest on their money than if they receive it all upfront.

And finally, for many sellers, how much money and how it’s paid, is often less important, than who it is,’they let buy their business.

For a large percentage of sellers, its more about how confident they are that the buyer will look after their brand, and their employees, once their business has been sold.

If you have any questions on this topic about buying a business, or on any other aspect about the process involved in buying a business, please drop a comment below.

And always remember that no question is a stupid question, if you don’t know it, you don’t know it, and by having the answer to a question you have, might be all it takes to move to the very next step in your journey to buy a business.

Take care and I look forward to seeing you on my next video.