Seller Lending the Standard in Website Business Deals
With the state of the global economic condition in a seemingly neverending free fall, the environment in the internet business for sale segment has cooled along with several other industries. There is plenty more caution in the market, with buyers picking only the most resilient of opportunities that have been able to weather the financial storm.
Henceforth, there are many more sellers rising from this quicksand, listing their companies and looking to find a buyer to buy them out so they can protect their nest egg during these uncertain times.
On the other hand, there are less buyers with the available money to consummate a deal with the sellers. To make matters worse, the tight credit markets have all but insured that available credit previously easy to get, has all but dried up. In fact, the Small Business Association arm of the government that guarantees small business loans through the banks has just redefined their criteria that in effect inhibits most qualified buyers from acquiring financing.
In effect, they have decided that a business’s goodwill can only account up to 50% of the valuation of the total business appraisal or a maximum of $250,000. The balance tangible assets such as equipment, etc. This means the virtual dirth of any aspiration for internet business buyers wanting to finance internet businesses since the main component of the appraisal is going to be goodwill based upon profitability rather than the virtual element of the website itself!
This has now created a major trend towards owner financing in order to effectively close a transaction. There are several benefits to this deals close much quicker. SBA loan drag on for three to four months before they are completely funded. Seller financed deals can close quickly since they are less complicated and the collateral is the internet business which will be taken back if the buyer defaults. In addition, the owner can earn a much better interest percentage on the loan portion than they would in a CD, so they will actually earn more in the long run. Particularly when the tax liabilities are taken into considered. Taking monthly principle and interest verses one large amount at close can deflect taxes and maybe reduce the tax level and ultimate liability over the long run.
The anticipated disadvantages are added risk of default, longer payout time period, and lower cash at closing. Risk can be reduced based upon the strength of the buyer and their credit rating and background of prior internet success. Owner financing is only prudent with the most qualified of prospects and with a comfortable percentage paid at closing. The typical percentage of owner financing occurring now is 25 -50% with a few minor exceptions of up to seventy-five percent.
In the end, both buyer and seller who want to get a deal completed need to make compromises so they can attain the mutually beneficial outcome of completing the online.
