N3 Business Advisors
Role of Seller Financing in a Business Sale
Updated: Mar 4
What role does Seller Financing play in a Business Valuation ...
Generally, a prospective seller asks the business broker or their accountant what he or she thinks that their business is worth. The business broker usually explains that a review of the financial information is necessary before a price, or a range of prices, can be suggested for the business.
Most sellers have some idea about what they feel their business should sell for – and this is certainly taken into consideration. However, the business brokers are familiar with market considerations and, by reviewing the financial records of the business, can make a recommendation of what they believe the market can pay for the business. A range is normally set with a low and high price. Generally, the more cash is demanded upfront by the seller, the lower happens to be the selling price; the smaller the cash requirements of the seller, the higher is the price and bigger becomes the pool of buyers.
Since most business sales are seller-financed, the down payment and terms of the sale become very important. In many cases, how the sale of the business is structured is more important than the actual selling price of the business. Too many buyers make the mistake of being overly-concerned about the full price when the terms of the sale can make the difference between success and failure.
For an instance, if as a buyer you could buy a business that would provide you with more net profit than you thought possible even after subtracting the debt service to the seller, and you could purchase this business with a smaller down payment, would you really care what the full price of the business was?