The availability of financing for the sale of a business has a major impact on its value. While we are all familiar with the high multiples of publicly traded companies (10 and up), these high multiples are influenced by the availability of capital and the interest rate. Most frequently, some portion of even the very largest deals are financed with institutional funds and will be directly influenced by capital availability. Typical, when money is available and interest rates are low, M&A activity is robust and high multiples are recorded.

We consider financing a major factor in valuing and selling a business and consider the availability of financing in our evaluation of the asking price of your business. Many small business deals are financed through the SBA program and we will consider the deal from this perspective. The SBA is a cash flow lending program, requiring that the deal exhibit sufficient cash to pay the owner a sufficient salary to meet his bills and show a historical abilityto cover debt adequately. Institutional lenders will only look at tax returns and will only consider what they consider as justifiable addbacks; e.g. while you may feel that some credit card expenses are personal, they typically will not allow credit card addbacks.
If the business records are poor, or the filed returns do not provide sufficient addbacks to justify the loan required, the seller may have to consider holdinga note. While this may appear to be undesirable, it may result in the highest sales price for your business. The buyer (and his accountant) are more likely to accept addbacks you want them to consider, presuming you provide reasonable support. Without, the availability of outside financing, buyers will expect a discount for a deal requiring a full cash investment. It has been estimated that an all-cash transaction will yield 30% less for the seller.

Obviously, it will be less risky to collect all your money at the close of the transaction, but the likelihood of completing a transaction will increase if youwill consider funding some of the acquisition cost. We advise a four-step process if you are willing to consider providing financing:
- Comfort (“Eye Ball Test”): You should meet with the buyer and feel comfortable with the individual. You have been in business for many years, have met with many people and can judge character. Our advice is if you’re not comfortablewith this individual, at a minimum you require a larger down payment, or only consider an all-cash transaction.
- Experience Test: You should interview the perspective buyer to judge if this individual in your opinion can operatethe business and be successful. You know your business
best and will the best judge of his ability to succeed. If in your opinion, he won’t succeed, walk away.
- Cash: The buyer must be investing some of his own moneyin the deal. He must have “some skin in the game”, or some money to lose. If he doesn’t, it will be too easy to work away, and finally
- Credit: You must review the buyer’s personal credit report to convince you that he is a person who pays his bills on a regular basis. People who have a poor credit history, pay bills late are not good risks. It’s extremely frustrating to wait for that monthly check and you’ll be even more annoyed if he falls behind.
If during the process you question the integrity of the buyer, you should at least re-think the credit risk.
With these caveats, Seller financing can provide a higher sales price for the business, additional interest earnings to the seller and is how many deals are completed. It is wise for a seller to keep an open mind about providing financing and to consider this means to achieve the highest return for his business.