The pros and cons of accepting seller financing
With traditional SBA financing being difficult to obtain for internet business transactions, ecommerce business brokers usually recommend offer some type of seller financing. Our website brokers recommend seller financing for several reasons, especially when our listing strategy is seeking a premium asking price. One of the first questions that most buyers have for a website broker representing a business of interest is focused on the seller's willingness to finance a portion of the total sale price. While most sellers would prefer an all cash deal, there are several advantages to offering selling financing, some of which can ultimately result in a higher overall sale price compared to only accepting all cash offers. An experienced ecommerce business broker should explain these advantages to the seller before bringing the listing to the market to ensure everyone is on the same page with regard to acceptable deal structure.
Offering seller financing can instill a considerable amount of confidence in the buyer with regard to the company's future success and performance. This is very important because ecommerce business broker valuations are often based on the company's expected future performance. If the seller is confident in the company's future success, the seller should be open to receiving a portion of the total purchase price in the form of seller financing. In other words, "actions speak louder than words" comes into play when structuring the deal and a seller financed deal structure can often result in a higher total purchase price, especially if there is an earn-out deal involved. A website broker might get some initial resistance from sellers for accepting a deal structure with seller financing, but if explained properly, the seller will see there are many protections that can be built into the final purchase agreement to help mitigate their risk. First and foremost, if the buyer defaults on any of the seller financing payments, the buyer would lose everything. In the event of default, the buyer would lose the business that was just purchased because the business would revert back to the seller, plus the buyer would lose all of the cash paid at closing. Since most seller financing deal structures only involve approximately 20% of the deal being financed, it's very rare to see a buyer pay over 80% of the purchase price just to default on the remaining selling financing payment because the buyer would lose their entire investment. This creates the proper level of incentive for the buyers to follow through on the seller financed payments and helps the seller feel confident that they will ultimately get the total purchase price that was agreed upon, even if it means a website broker has to sell the business as a "fire sale" in the event of a buyer default. An experienced ecommerce business broker can help explain the complexities of seller financed deal structures as there can be many benefits, especially since most traditional banks will not offer SBA financing for sellers that are in the process of selling a website business. Seller financing structures can be risky for the buyer because there is obviously no guarantee that the business will continue the current level of performance, but it's still less risky than the buyer paying all cash for the business at the closing.