Donna Genie explains seller financing as an alternative when traditional loans are expensive or unavailable. You act as the bank, charging interest while spreading income recognition across years for tax benefits. The main risks: buyer default, needing collateral, and the difficulty of repossessing a business if things go wrong.
About 10% to 12% (plus guarantee fees).
8%.
The idea of selling your business is a big deal and you need to look at a lot of considerations. One of the current problems in selling is that interest rates are so high it makes it difficult for a buyer to get financing, whether that be traditional financing through a bank or with a guarantee through the SBA. SBA loan interest rates are running about 10 to 12% currently and they have guarantee fees on top of it, so that kind of adds to it. It may be difficult to get through underwriting if someone has other obligations and doesn't have a lot of room to pay for the purchase of the business, even though they may be your best bet and your best candidate for buying the business. So many people choose to look at seller financing when interest rates are high as well. Now it has both its pros and cons. So let's investigate a little bit. In seller financing, basically you become the bank. So each month when the payment is due, that buyer of the business would actually be paying you instead of the bank. Your payment would include interest. So if the SBA guarantee fees and rates are running between 10 and 12%, what if you could get 8% on seller financing right now? It'd be a win win because your buyer gets a lower interest rate makes it more affordable for them to purchase the business and grow it. And you'll be making more money than if you take the proceeds from the sale and put it in the bank or even invest it right now. So it may be a good opportunity for you. Now, looking at the seller financing piece of this, you also have to consider what are my downsides now in seller financing? I highly recommend that you get collateral, the collateral being more than just the business. And you'll have a personal guarantee so that you can go after them if they default. So if they default, what happens if they stop making payments? What happens if they close the business? What happens if they destroy the business? These are all considerations on your worst case scenario to consider. So let's assume that business is slow and they're not doing well. They really weren't cut out to be the business owner and they don't make the payments to you. Your choice then is to go after them legally. So you're going to have to pay attorneys probably to do this, but you're going to have to be able to take the collateral to make up your difference or you're going to have to take the business back and foreclose. And I say or maybe an and situation where you do both. If you take that business back, keep in mind, it may not be in the same condition as when you sold it. So they may have made your customers mad. They may have stopped selling things. They may have money outstanding to vendors that they aren't paying. It may not be the same value and most likely won't be the same value at the point at which you sold it. So sometimes it's not helpful to take the business back. But there are some other things that you want to look at to make sure. I've seen it work out to be a really great situation for some and a really poor decision for others. So you've got to weigh each circumstance and evaluate each buyer individually at what you think their success rates are and their experience. So looking at seller financing, the other factor is that it may also give you a tax benefit. If you sell your business and the cash buyer comes in, you'll have income fall in one year. So you kind of have that windfall all hitting and that may make your tax rate higher. With seller financing, typically you are just going to recognize a little piece of the income each year, the part that you receive in payments. So that may also help your tax situation. So there's lots of considerations. If you would like some help navigating and getting your business ready to sell so that it sells for top dollar, please let us know. We can assist you in getting your business ready, determining the proper value, and helping you make the decisions along the way to evaluate buyers and selling situations.
