Why New Mexico business sellers are turning to seller financing

How do I sell my New Mexico business? Seller financing is one path to maximizing the value you receive.

Why New Mexico business sellers are turning to seller financing

On Wednesday, the Fed raised interest rates a quarter point, making it the eight time that they’ve adjusted the bank rate in the last 12 months, and putting interest rates at their highest level since 2007. The banking industry anticipates more increases totaling an additional three-quarters hike by the end of 2023.

The Fed’s main if imperfect tool to combat inflation, higher interest rates come when many business owners are ready to exit their business and retire. The proceeds that they receive from the sale of their business is not inconsequential. It is a major consideration in funding their retirement. Many business-owning baby boomers were ready to take the leap back in the mid-aughts, were hit by the Great Recession, had to rebuild their businesses, only to be thwarted by 2020-21’s global pandemic. Just when retirement looked within their reach, now they face rising interest rates. SBA 7a loan rates are now hovering around 10% to 10.5%.

Increases to the bank rate complicate the process of selling your New Mexico business in several ways. They make it more difficult for business buyer’s to secure financing, diminish the pool of potential buyers, draw out the selling process, and put downward pressure on business prices. Increased market volatility also induces some buyers to sit on the sidelines or explore other investment opportunities.

Against these considerations, more New Mexico business owners are exploring Seller Financing. This is an arrangement in which the seller agrees to provide financing to the buyer instead of, or in addition to, the buyer obtaining financing from a traditional lender. Its advantages are worth taking a look at. Here are some potential benefits:

  1. Attracting more buyers: By offering seller financing, you may be able to attract more potential buyers who might not be able to obtain financing from a traditional lender. This can help expand the pool of potential buyers and increase the likelihood of finding a buyer who is willing to pay the price you are looking for.
  2. Higher sale price: By offering seller financing, you may be able to negotiate a higher sale price for your business. This is because buyers may be willing to pay more for a business that comes with the added benefit of owner financing.
  3. Additional income. The seller makes money not only on the principal of the seller financing but on the interest as well.
  4. Steady income stream: Seller financing can provide you with a steady income stream in the form of monthly payments from the buyer. This can be a useful source of passive income, especially if you do not need the entire sale price upfront.
  5. Lower taxes: Seller financing can also provide tax benefits by allowing you to spread out the gain from the sale of the business over time, which can lower your tax burden in the year of the sale.
  6. Faster sale: Offering seller financing can potentially lead to a faster sale of your business, as it can eliminate some of the hurdles associated with traditional financing and streamline the buying process.

Sam Goldenberg & Associates helps New Mexico business sellers structure deals to ensure a higher degree of protection. Some business sellers may plan to retire out of state, meaning that taking back the business in the worst-case scenario is not an option. Seller financing can feel like a safer bet if one or more of the following conditions are met:

  1. Buyer’s collateral. If a buyer owns a second home or other major asset free and clear, you can take a lien out on this asset in addition to the business to collateralize the buyer’s debt.
  2. Buyer’s relevant experience. If they have industry experience or a proven track record of running businesses, you will have more confidence in their ability to successfully take the helm of your business.
  3. Ability to review the business’s financials. A provision can be added to the promissory note that allows you to review the business’s financials on a quarterly basis. If gross revenue drops off by more than a stated percentage, the buyer is required to hire you as a consultant to help turn the business around. This can typically be handled remotely.

Take the hypothetical example where you sell your business for $600,000, and the buyer puts down $250,000. You finance the remaining $350,000 debt over seven years at an 8% interest rate. In the third or fourth year, rates fall to a more palatable level, the buyer refinances through a bank and pays you the outstanding balanced owed. Here is the total benefit, before the broker’s commission and other closing expenses, that you will receive.

  • Down Payment at Closing: $250,000
  • Monthly Recurring Payment: $5,455.18
  • Total Monthly Payments through Year #4: $261,848.16
  • Total Interest: $85,933.28
  • Balloon Payment: $174,084.64
  • Total Amount Received: $435,933.28

You get to pocket an additional $85,933.28, and the favorable tax advantage allow you to keep more than what you’d have to pay the IRS on a lump-sum sale.

Seller financing isn’t the only option, and it is not the right fit for every New Mexico business seller. We have relationships with banks that are offering subprime loans, but they tend to look only at select industries. Coupling a business sale with the sale of the real property can also ameliorate the effect of high interest rates. If you’d like to learn more, please reach out to Sam Goldenberg & Associates at (505) 820-0163. Buy a Business, Sell a Business, It’s our Only Business.