In deals under $1.0 million, where an owner-operator business is being sold to an individual buyer who intends to take over the seller’s daily role, seller financing has always been the most dominant source of funding. This is mainly due to buyers unwillingness or inability to meet rigid bank collateral requirements. It is the old story of the banks offering to lend whatever amount the buyer can fully collateralize, and the buyer simply not being able to secure the entire loan (isn’t that why they go to the bank in the first place?).
While it can be a risk for a seller, the reality is that most often, seller financing is the only way to get the deal done. Furthermore, for an individual buyer, they want the seller to have “skin in the game” since that may be the only leverage the buyer has over what the seller has represented about the health of the business. After all, if the seller is not willing to back up their claims by absorbing some of the risk, it does not provide too much assurance or comfort to the buyer.
Unlike the late night real estate infomercials where the alleged “gurus” will teach you their great strategies for 100% leverage and how “you too can buy fantastic real estate for no money down”, small business sales are not done that way. While leverage plays a role, buyers have to come to the table with a deposit. For an individual buyer with limited resources, the risk can be great and that concern, coupled with few available lending sources, has meant that seller-financed deals is the norm in these size deals.
Jim Sinclair, Senior Vice President of Murphy Business & Financial Corporation LLC, a national business broker and M & A firm, advises his seller clients to “act like a bank if they are going to offer financing to the buyer.” To this end, he urges them to do a thorough background and credit check on the buyers. Sinclair says that while deals vary greatly, “under the right scenario, a buyer can expect the seller to carry a maximum of 50% of the total purchase price as a balance of sale.”
Read more