A large portion of baby boomers are business owners because the scarcity of jobs when they entered the workforce drove them to create their own jobs and become...
How to Sell a Business: Prepare for the Sale
Consider financing a portion of the sale to increase the chances of a successful sale
What is seller financing? With seller financing, the buyer makes a down payment on your business and then makes monthly payments until the price is paid in full. Some sellers erroneously think that they have to lend the buyer money – you don’t. Keep it simple – you get a down payment and then you receive periodic (typically monthly) payments until you are paid in full.
How do I know how much to finance? It has to make sense. If your business makes a profit of $7,000 per month, then a note of $4,000 per month will surely not make sense. The profit from the business has to be able to pay for the note and pay the buyer a living wage. If it can’t, then it isn’t going to work.
The following information is based on statistics on over 10,000 business sales:
- Average interest rate – 7-8% (There is very small variance.). This is based on risk, not prevailing interest rates. Financing a business is risky, hence, the relatively high return.
- Average length of note – 5 years (varies from 3-7 years).
- Average down payment – 50% (varies from 30-70%).
- All cash deals – less than 10% of businesses sell for all cash.
The bottom line – If you are not willing to finance the sale of your business, then there is probably going to be some other seller with a reasonably similar business who is. Buyers consider many alternatives so your business must be competitive with other businesses on the market. The businesses that sell are those that can be financed, either through the seller or through a bank.
Bank Financing - If a business owner reports all income and shows a high profit on his/her tax return, then almost any buyer could obtain financing from a bank on the business. Most sellers do not report all of their income and often report excessive expenses to minimize their taxable income. While their is nothing wrong with this and nearly 90%+ of business owners do this, it does make bank financing difficult to obtain when selling your business.
Are you unsure how to structure your sale for seller financing? Use our complete Business for Sale Package – we cover this and many other important considerations. The kit is low cost and includes nearly all of the forms and other tools needed to sell your business.