Sometimes when a seller is looking to close a deal, they will offer seller financing to the buyer as a way to finance a portion of the sale price. Typically, it’s done as a way to increase the likelihood of selling your company quickly.
But, sometimes seller financing can put your portfolio at risk. If you invest your money in supporting the wrong buyer and they do damage to your company, it can wipe out your retirement fund.
That’s why it’s so important to protect yourself if you choose to engage in seller financing. Check out these tips to get started.
1. Take the Risk Seriously
Ideally, selling your business would involve a cash sale where you can walk away cleanly from your company with money in the bank. But when you choose to finance a buyer, you will be tied to your business for a lot longer.
Make sure that you take this risk seriously. Once you sell your business, you will no longer be in charge of making the calls. Consider the decision as you would any other investment. Do you believe the new owner will be able to successfully pay you back?
2. Leverage Your Interest
Choosing seller financing has upsides as well as risks. If the buyer is talented, your interest-earning investment will be rewarded.
Don’t view seller financing as a desperate way to unload your business. Leverage your willingness to finance a buyer as a way to bargain for better terms during your negotiation process.
3. Let Buyers Know It’s on the Table
Seller financing is a huge selling point for a business. Many people want to own a company but can’t afford to make it happen. When you are financing your buyer, you want to make sure you are choosing the best candidate on the field for bringing your company to the next level.
Seller financing shouldn’t be disclosed as a last-ditch effort to save a sale. Instead, choose to make it a bargaining chip for your business sale.
4. Encourage a Down Payment
When a buyer puts down a reasonable down payment for your business, it can help dissolve some of the risks involved. It helps to minimize your exposure by giving some of the risk to the buyer as well.
As a seller, you should only consider financing as much as fifty percent of the sale price. Any more than that would require very special circumstances.
5. Don’t Let Them Pressure You
Buyers who have difficulty securing financing from traditional avenues will go to a seller and ask them for financing as a way to continue the sale. But just because the deal that is on the table seems to be falling through, doesn’t mean that you should plug the leaks yourself.
Before you choose to finance a buyer, you need to be sure that they are the best person to run your business and be confident in their ability to expand and grow your company. If you are doubtful of a buyer’s abilities, wait for a better candidate to emerge. When you choose to finance as a seller, you hold all of the cards. Don’t give them up.