Sell Your Hotel Faster, and For More Money, by Providing Seller Financing
By Mike Handelsman, Group General Manager, BizBuySell.com
There's nothing more frustrating than a listed business that attracts a lot of attention, but no buyers who are willing to seal the deal. Unfortunately, that's exactly the situation many hotel owners are facing in today's marketplace.
Most of the time, the hotel isn't the problem. In fact, a business that generates significant attention in the marketplace is usually a good candidate for a sale. Instead, the issue is most often the buyers' inability to secure financing at the owner's asking price. That leaves owners with two options: Either lower the asking price or work with the buyer to overcome sale barriers.
A seller's willingness to finance at least part of a business sale has always been a strong selling point for buyers, but in recent months it has become essential. With many potential business buyers unable to access the necessary funds from lending institutions, hotel sellers who decide to offer seller financing are likely to have much more success selling their business than those who do not.
While it sounds like a no-brainer for hotel sellers to offer financing, they should be careful not to do so unprepared. When making the decision to offer financing, there is a great deal to consider and research in order to help ensure a successful, smooth process. To stay on track, sellers need to follow some obvious - and some not so obvious - dos and don'ts.
Can seller financing be risky? Absolutely, but under the right circumstances it can also be a financial boon. If financing the sale of your hotel sounds like a good idea, don't make another move until you've carefully considered the lessons being learned by other seller-financers.
Evaluate the Risk
A cash sale is an essentially risk-free transaction for the seller. Once the deal is done, the seller can comfortably walk away from the business with money in the bank. In an owner-financed transaction, the seller continues to be tied to the business for several years after the sale is complete. If the business succeeds, the new owner pays back the principal with interest and everyone is happy. But if the new owner is unable to make the business profitable, the seller could suffer the loss of interest income and incur additional costs to collect the debt.
The bottom line is that an owner-financed sale needs to be evaluated as a business investment. Like any other investment, there is a certain amount of risk inherent in the decision. If you are comfortable enough to invest in the new owner, then it could be very beneficial to finance the sale yourself. But if you aren't confident the buyer can make the hotel a success, you'll want to think twice before offering financing as an enticement to close the deal.
Advertise Your Willingness to Finance
Some hotel sellers are hesitant to advertise a financing option because they aren't totally sold on the idea and view it solely as a last resort. The truth is that f you aren't comfortable with the idea of financing, you shouldn't consider it as an option at all. If you are, though, it is important to include the information as a selling point in your marketing efforts.
One of the most productive avenues for advertising a seller-financed company is online. Seller financing has become so important in the business-for-sale marketplace that at BizBuySell.com, we recently launched a feature that allows sellers to clearly advertise their willingness to offer it, and buyers to search only for businesses that are at least partly seller-financed. These details now appear prominently alongside other essential information such as business description, location, asking price and cash flow.
Leverage Interest and Increased Sales Prices
If the buyer is a good investment risk, the seller stands to benefit greatly by self-financing. Too many sellers view financing as a desperate last attempt to unload the business when they should be viewing it as a resource for enhancing the benefits of the sale.
From the start, your willingness to hold paper increases the final selling price of the hotel. Partially-financed sales typically result in a price that is more than 15 percent higher than their cash sale counterparts. That means you can leverage your willingness to finance as a bargaining tool during negotiations.
In addition, financing the sale provides the opportunity to multiply the principal value of your hotel through future interest payments from the buyer. A financed sale garners a much higher rate of return than many other investment vehicles with a five to seven year note at 8 to 10 percent interest as the norm.
Get Help from Professionals
On the surface, an owner-financed sale might seem mostly like a do-it-yourself transaction. Instead of relying on professional lenders for financing, the seller assumes the responsibility for a percentage of the buyer's investment.
It's important not to get too caught up in the do-it-yourself mentality, though. A loan between a seller and a buyer is subject to limitless structures and variations, many of which require the input of professionals in order to secure airtight collateral, coherent loan terms and adequate insurance coverage. Before you agree to financing, obtain legal and financial advice from a professional you trust, be it a business broker, accountant, attorney, or other intermediary.
Don't Waive the Down Payment
It's true that an owner-financed sale can be a risky venture, but a healthy down payment can minimize a hotel seller's exposure by distributing an equal or greater amount of the risk to the buyer.
If you are new to the business financing game, forget everything you think you know about down payments. A business and a home are two entirely different things. While your home mortgage lender typically requires a minimum down payment of 15 percent or less, business loans usually require a much higher upfront investment.
Generally speaking, it's in your best interest to finance no more than 1/3 to 2/3 of the sale price. If you decide to finance more than that, you need to have a legitimate reason for doing so. For example, if you are selling the hotel to a family member, you may have a vested interest in financing an amount beyond the normal range. Just be aware that as your financing commitment increases, so does your risk.
Don't Give in to Pressure
It's not uncommon for potential buyers to attempt to strong-arm sellers into financing a deal or offering a greater amount of financing. As the economy struggles, this is becoming even more of a reality, as more buyers are unable to secure financing from traditional lending sources.
No matter how anxious you are to sell the business, caving into buyer pressure for the sole purpose of closing the deal is a big mistake. When a buyer pushes too hard for financing, take a step back and conduct a simple reality check. If you aren't completely comfortable with financing the buyer's purchase, walk away and wait for a better buyer candidate to emerge. It's true that seller financing will help you sell the hotel faster, but that won't help you if it's a decision you have reason to believe you'll end up regretting later. Approach each buyer inquiry on a case-by-case basis, and do only what feels right.
Mike Handelsman is Group General Manager for BizBuySell.com and BizQuest.com, the Internet's two largest and most heavily trafficked business-for-sale marketplaces. Both sites feature business valuation tools that draw from the largest databases of sales comparables for recently sold small businesses and include two of the industry's leading franchise directories. Since 1995, BizBuySell and BizQuest have offered tools that make it easy for business owners and brokers to sell a business and for potential buyers to find the perfect business. Together, BizBuySell and BizQuest list more than 75,000 businesses for sale at any time and have over 850,000 monthly visits. Mr. Handelsman can be contacted at 415-284-4390 or mhandelsman@BizBuySell.com Extended Bio...
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