Is Seller Finance The Worst or Best Possible Result For a Departing Owner?
Having gone through many deals one of the most interesting things I’ve come across is seller finance.
The interest comes from the fact of how different seller finance is viewed by departing owners.
I don’t need to tell you, but when a business owner wants to sell his business he obviously wants all his payment up-front.
A buyer on the other hand, will do his darned best to avoid paying anything up-front at all.
This chasm is why seller finance is so potent in today’s deal-making world.
What Is Seller Finance?
Seller finance may be known by different names, depending on where you’re from.
Essentially, it’s the seller him or herself funding the sale of their business.
Typical scenario is where let’s say £5M has been agreed for the sale of the business.
£1M has been agreed to be paid on closing, the rest deferred in equal instalments for the following 4 years.
In effect, the owner is due £5M. He gets £1M on closing, and “gives” or “lends” the remaining £4M back to the buyer.
Practically speaking he never actually receives the £4M in the first place to give or lend it, but the nature of the deal confirms it’s his money and is to be used as a sort of loan to the in-coming buyer.
The buyer then pays the seller over the coming years, based on the terms agreed prior to sale.
I Want All My Money Now
At first glance you’d think why would a departing owner agree to such a deal, especially when we’re all conditioned to want all our money now.
But the fact is we’re buying a business, not a car.
Even with cars these days, it’s all financed, but rarely does a private individual finance the sale of his own car.
It’s like expecting an individual to pay for a house up-front all by themselves…it’s just not feasible.
And so it is with the sale of a business.
For the most part, it’s just not feasible for a buyer to pay the full purchase price up-front.
Not My Problem, They Can Get The Money From Elsewhere
Yet there are those owners who won’t consider seller finance because they want their money now, it’s not their problem to raise finance, the buyer can simply go elsewhere to find the funds.
With so many funding options available in today’s market, whether it be debt finance, equity finance, venture capital, crowd-funding or any of the other numerous methods…it’s not hard to see why an owner would feel this way.
They’re selling the business, they’re giving it up, they therefore should receive all of their money, end of.
But is that really a smart way of doing the deal?
A Change In Perspective
Maybe a change of perspective, or re-framing the situation will help.
Imagine as an owner, you’re working 50-60 hours a week in your business.
You’re tired. Worn out. Running on empty.
But you need the money you’re making from your business. You’re getting paid for your hard labour and graft.
Now imagine getting paid the same, or in fact getting paid more, every year for doing none of the work.
Yep, that’s right. The long hours. Stress. Heartache. Trouble. All gone. You no longer need to lift a finger. But you still get paid!
That’s a pipe-dream for many of us, and an enviable position we’d all covet.
Yet that’s what’s available for owners who take up the seller finance option.
It becomes a sort of investment.
As an owner, what would you do with all the money you received anyway?
If you’re smart and sensible, you’d invest…so you get a return on your investment.
Is there a safer investment than the business you know like the back of your hand?
The business you established, you built, and you made successful?
Or would It be better to give your money to a financial adviser that’ll place your money in places you don’t understand?
With seller finance, you’re not only giving the money back to your former business, you’re making a return on it (depending of course on what you negotiate).
Then there’s the fact that the person you trusted to take on your business might have to look elsewhere for funding instead; and the people willing to provide the funds may be people whom you wouldn’t want anywhere near your business.
Wolves sniffing away for possible control at some point, especially if things start to wobble.
What To Do With So Much Free Time Anyway?
And of course, you still get to keep an eye out on your baby.
You get to see what’s going on. If it’s being properly nurtured and taken care of.
With all that free time after exiting, you might find that you need to spend a few hours on business.
What else will you do with so much free time now you’re no longer working?
There’s only so much time you can spend swingin’ away on that golf course.
So effectively, seller finance gives you the position where you:
– Continue to receive payments despite not working
– Receive an additional income by way of returns on your seller finance amount
– Make sure no grubby individual or institution gets a sniff of control
– Get to keep an eye out and maybe still contribute to your beloved business
Doesn’t sound too shabby now does it?
In fact, for some owners it’s the perfect blessing so much so they agree to a complete seller financed deal, in that they take no up-front payment at all.
If you’re struggling to sell your business, and the prospects of liquidation increase, a seller financed deal fast becomes your saviour.
Thinking about retiring or exiting your business? Need a plan to ensure you receive maximum benefit from your years of hard labour?