As buyers struggle to raise the financing needed for acquisitions amid a turbulent economic environment, owners seeking to sell their businesses may find that their pool of potential buyers is smaller and that they are unable to achieve the kind of valuation that they’d expect. In this scenario, it may be useful for owners to think outside of the box and approach the process differently, perhaps by seeking to sell their business through an alternative deal structure, such as seller financing.

Seller financing is a unique approach to selling a business, through which the seller becomes a lender, offering a loan to the buyer to facilitate the sale. This arrangement is governed by legally-binding terms, typically requiring the buyer to make an initial payment and subsequent monthly repayments with a specified interest rate over an agreed-upon period.

Once the buyer fulfils the repayment terms, the transaction is considered finalised, and the seller assumes full ownership of the business.

Mitigating potential risks
Selling a business through seller financing carries inherent risks, as it maintains a financial connection between the seller and the business. Unlike a conventional sale, where the seller receives the money and walks away, seller financing involves ongoing involvement.

If the new owner encounters difficulties, leading the business to struggle or even collapse, the seller may face potential losses. To minimise these risks, thorough evaluation of each potential buyer is crucial. Conducting meticulous due diligence on prospective buyers, particularly scrutinising their industry expertise, financial track record, and business plans, is vital to mitigate risk exposure.

Engaging the services of a reliable professional advisor, capable of providing comprehensive legal and financial guidance throughout the sales process, is highly recommended. An advisor can assist in conducting due diligence and negotiating favourable seller financing terms.

Additional measures to reduce financial risk include requesting a higher initial payment, applying a higher interest rate, and potentially setting shorter payment terms to expedite the repayment process.

The advantages of seller financing
Seller financing offers several distinct advantages. Firstly, it expands the pool of potential buyers, possibly helping to generate increased interest and improving the chances of successfully selling the business, particularly during uncertain economic conditions.

By offering seller financing, a seller may attract a buyer ideally suited to take over the business but lacking the necessary funds or access to traditional bank financing. Choosing the right buyer becomes even more critical when employing seller financing, as their potential for success in running the business post-sale is paramount.

Seller financing also streamlines the sales process. While caution should be exercised in evaluating prospective buyers, the availability of seller financing can alleviate some of the pressure and expedite the process compared to dealing with traditional mortgage lenders or banks.

Furthermore, though the seller only receives a portion of the business value upfront, seller financing can potentially result in a higher overall sale price in the long term. Monthly payments with interest rates provide a consistent cash flow, as opposed to receiving a lump sum.

Additionally, the extended payment period may have fewer tax implications compared to receiving the entire sum at once. Finally, the presence of seller financing can make buyers more inclined to agree to a price close to or even at the seller's desired amount.