What do we see in 2023?

The economic outlook for most of the world is looking uncertain in 2023, with experts telling us that we should expect ongoing inflation and subdued economic growth.

With that being said, there’s no doubt that rising interest rates will have an impact on business transactions in the new year, and we’re seeing it already in the pace of inquiries and initial offers. However, unlike residential real estate, there is a well-established and accepted process by which transactions can, (and likely, will), move to close: Seller Financing.

In the simplest of terms, seller financing is when the owner who is selling the business provides the buyer with a loan for the transaction. This is beneficial to a buyer who may not be able to secure a loan from the bank. Additionally, the closing process is faster and less costly in most cases. Without a traditional lender, the purchaser usually makes a down payment directly to the seller then makes payments to the seller over time until the loan is paid in full.  Much like a standard bank loan, a seller-financed loan also has an agreed upon loan term and interest rate.

Seller financing provides tangible benefits for buyers and sellers. For buyers, seller financing generally offers:

  • Flexible rates and loan terms
  • The opportunity to negotiate affordable monthly payment
  • Avoiding strict qualifying requirements

For sellers:

  • The ability to sell a business that has characteristics that make it less attractive to traditional lenders
  • Faster closing process
  • The ability to defer taxes by taking payments over time (consult with your accountant)
  • The opportunity to give the buyer their best chance for success by keeping the payments within a reasonable ratio to the cashflow of the business.

The length (duration) of the loan is usually much shorter in a seller-financed transaction, in order to keep the payments affordable, the buyer and seller may consider creative options such as allowing the buyer to make a payment as if the loan were amortizing on a longer schedule with a balloon payment of the principal balance at the end of the agreed term.

There are always risks when lending money but, in most cases, there are more pros than cons to seller financing for both the seller and the buyer.  According to BizFilings, seller financing is used in up to 90 percent of small-business sales, and more than half the sales of mid-size businesses.  In 2023, seller financing will continue to benefit transactions as interest rates fluctuate.

If you’d like to learn more about the upside and downside of seller financing, contact the Liberty Group of Nevada at info@libertygroupnv.com.

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