The Impact of Seller Financing on a Business Sale

Many transportation business owners I speak to throughout our industry have either heard about or personally experienced an episode of what I like to call “When Seller Financing Goes Bad.”  Regardless of how you feel about seller financing, its inclusion or exclusion from your business sale will greatly impact your exit from this industry.  The more you understand about the role seller financing will play in a business sale, the more satisfied you will likely be with your industry exit.  Here’s 4 points to consider.  Read on…

1. Qualifying for Financing
Unless you are going to rely on a buyer to pay all cash, a lender will likely play a role in your business sale.  It is important to understand that many lending institutions require a percentage of seller financing.  Having the seller finance a portion of the transaction adds stability to the lending institutions investment.  If a seller is not willing to share some of the risks through seller financing, it is a red flag to lending institutions.  The amount of seller financing required could be marginal.  But the complete absence of it could be a deal breaker.

2. Casting Out the Largest Net for Buyers = More Purchase Offers/Better Match
Seller financing affords creative packaging options that bring more buyers to the table who without seller financing would not be a candidate for your business purchase.  Some of these candidates may be the best possible trustees of the business you have built from scratch.  They just don’t have boat loads of cash to allocate towards a deal.  When I am working for a seller, I encourage him or her to offer as much seller financing as they are comfortable with to qualified buyers. I also encourage them to allow me to screen candidates and help them determine what % of seller financing the potential buyer qualifies for.  Collectively, we reserve the right to tell an interested buyer, “No…or, based on your qualifications you qualify for this amount of seller financing.”  The absence of seller financing eliminates opportunities to bring buyers to the table that may be a great fit to take over your business.  

3. Competitive Packaging. You are not just competing with other limousine & chauffeured transportation or bus companies that are for sale. 
In order to be competitive with other industries, you have to take into consideration how companies from other industries are being packaged for sale and respond accordingly.  In many cases this includes a small or in some cases significant percentage of seller financing—depending on the financial performance of the business for sale.  Buyers and lending institutions do not care that your business has the best reputation in the region, or the best sales performance.  They are in the business of making money just like you.  If you expect them to take risks they do not have to take, you will likely be disappointed.

Many buyers are evaluating businesses from multiple industries simultaneously.  The absence of seller financing as a part of purchase package eliminates your ability to compete with businesses for sale from other industries who appreciate the importance of a seller sharing some risks along with the buyer and lender.    

4. The Risks of Seller Financing
I appreciate the risks associated with seller financing completely.  Seller financing can go bad when proper provisions are not taken.  At the same time, many risks can be dramatically reduced by identifying creative ways to collateralize the seller’s financing. 

Let’s consider and focus on what is often overlooked about seller financing: The positives.  Seller financing brings more buyers to the table, more options to get the deal financed, as well as opportunities to add additional value to the deal (through increased sales price and interest from financing). 

The risks of seller financing are no less real than the risks of moving forward with business as usual.  We have no control over the economy and other external factors that can literally transform the value of our business and/or future proceeds from a sale overnight.  *You read in last month’s issue about former NLA president Alan Melton.  After selling his business, 9/11 happened and his sales dropped from $8 million to $4 million overnight. 

In any economic climate, I think you will find few buyers and very few lending institutions interested in purchasing your business if you are not willing to share at least a small percentage of the post-transaction risks.

Conclusion:
Seller financing, whether you choose to include it or exclude it from your business sale, will certainly impact how you exit from the transportation industry.  If you have additional questions, or if you would like more information on the unique advantages Charles Tenney & Associates brings to your business sale, please submit the contact form below.

Return to Previous