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Last Updated on: August 21, 2020 by Joseph Muriithi
Most business sale transactions will often have some form of seller financing. What is seller financing? It is some kind of financing where the seller acts as a bank and lends the buyer finances to cover some parts of the agreed purchase price. It should be noted that the other part of the purchase is covered by the buyer through down payments or other external financing sources. To put it into simple terms seller financing is when the seller agrees to let the buyer have the business/ sale item without completing the agreed purchase price with an agreement that the buyer will pay off the balance gradually over time as agreed. When a business sale transaction involves this arrangement, the seller will often achieve higher final selling prices due to factors such as interest and agreement fees. Sellers who are not into financing likely limit the possibilities, but those who do should be aware of the way to go about it.
Perform Due Diligence, Know your Buyer
When you settle for seller financing, it is vital that you take all necessary actions to caution yourself against mishaps along the way. You are representing the buyer like a bank, do what banks do. Check a prospective buyer’s credit report, financial statements, financial capability and soundness, and any other relevant information. Remember, opting for financing means you don’t want your buyer defaulting. In many occasions, financing contracts allow for a 30 to 60 days cancellation of the transaction if financing fails. This way, the buyer and seller can avoid serious problems.
The financing contract comes with a number of stipulations intended to protect the seller. A common stipulation of these contacts is that; for a business involving inventory, the buyer “new owner” should maintain supplies to a certain level during the period of the contract. You can consult with a Business Planner for more details. They are more equipped with information, tools, and expertise to ensure a smooth seller financing transaction has been achieved.
With seller financing, there is a likelihood of higher price possibility and attraction of the attention of prospective buyers. Seller financing is considered a point of interest to most buyers. When a seller agrees to seller financing, it sends a very clear message about the good health of their business. This arrangement clearly puts across the fact that the seller is confident about the business and he can stay around while waiting for the contract to end and see the business generate short term and long term revenue. This level of confidence screams volumes to buyers about the condition of your business.
Know and Understand the Terms
All seller financing contracts vary from one agreement to the other. In terms of time, it typically takes on average 5 to 7 years. On the case of how much a seller is willing to finance, a discussion and common agreements take place. There are no rules that bound the limit of financing, you will find it common for sellers to finance up to 60% of the total purchase price. Finally, financing by Seller invites a lot of paperwork and factors to consider. It would be safer to consult with a business broker or an attorney to protect the interest of all involved parties and more importantly guide you through the process.
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