For many people, buying their own business is a pipe dream. Whether it’s the thought of a large capital outlay or a lack of know-how, it can be a stressful proposition. However there is an alternative, in which the buyer and seller can work together to help with financing the business – this is known as “seller financing”.
In the current climate where banks are often reluctant to take on risk, seller financing is a great option. In a nutshell, rather than a bank supplying a loan to the purchasing party, the loan is actually provided by the seller of the business.
This carries many of the same terms and conditions as a standard business loan, and requires a legal agreement signed by all relevant parties. Should the purchaser default on payment or be unable to complete the financial commitment required, the business will be repossessed or foreclosed.
Whilst this sort of arrangement is fairly common in the United States it’s less well established in the UK. However, there are many advantages to this kind of arrangement, for both parties – the buyer may often require a fairly small down payment, and it can be a good way for existing staff to purchase a business they already have some form of stake in, either as a minor partner or as an employee.
A good example of this could be bar staff investing and eventually owning the pub or restaurant they already work in: they already have a stake in the business (their job), and the long term payment option gives them a chance to work towards owning the business in their own right. The seller meanwhile is demonstrating good faith in the business by fronting the money (this also help reassure the purchaser that their investment is a good proposition).
A further advantage is that both parties can draw up their own terms and conditions and level of payments – this is much more flexible than a standard loan in which fixed monthly payments are made, and allows both sides to get an agreement they feel happy with from the outset.
There are of course a few downsides: the seller generally will not be able to undertake the usual level of background checks and credit assurances that would be a common part of a loan or mortgage, and thus there is a risk of not getting back all the money loaned to the prospective buyer.
In the case of a pub, the current owner may also be concerned about the long term view of his or her business – especially if it is well regarded or has a steady customer base. Selling to existing staff is a good bet in this case, as the future owners will already have strong ties to the clientele and have a feel for the best practices already employed.
Seller financing thus has plenty of positive points for all parties, and with a little care and planning on both sides, it can be an extremely good and low-stress way to purchase a business.
This article was contributed by BusinessesForSale.com, the market-leading directory of business opportunities from online media group Dynamis.