Which Works Better - Seller or Traditional Financing for My Agency?

Your agency is humming along, even during a hard market, and it feels like it's time to expand.  You have done the homework and you have found an agency that is for sale.  The market is good, the seller is agreeable.  Everything is falling into place.

There are many factors to understand when considering the right kind of financing for your agency.   Things to consider include affordability, length of the transaction, future profitability, and the source of your equity. 

But there is another important decision, among all other decisions involved with agency acquisition: Should I ask the seller to finance the deal, or should I work with a bank?  There is only one true answer.  It depends.

The first consideration is whether the seller will want to offer financing.  Here are potential benefits to a seller-financed transaction:

1. If the seller is willing to finance the transaction, that might be an indication of how he or she feels about the relative risk of the agency's long-term success.
2. Seller financing may provide creative deal structure for the buyer.  
3. The seller will earn interest on top of the proceeds from the sale of the agency.
4. There may be some tax benefit for the seller.
5. A seller will be more interested in the continued success and perpetuation of the agency if he or she is doing the financing.

Most of the reasons in favor of seller financing are conditioned upon the outlook of the seller based upon the well being of the seller, financial acumen of the seller, and perceived benefits inherent in this type of transaction. 

The benefits for the buyer are all predicated on the mindset of the seller as the deal is put together.  It's important to note that some of the considerations for seller financing may not be beneficial for the buyer.  Here are some examples:

1. Seller-financed deals may bring a higher sales price.  This is an agreement that buyer and seller need to work out.
2. The seller may want or need the full proceeds of the sale, which removes seller financing as an option.
3. There may be underlining debt for the seller, which removes seller financing as an option.
4. It's possible that the buyer wants to have a clear-cut distinction between the previous owner and the new agency owner.  Keeping the seller involved in the financing may keep the seller involved in the agency.
5. Bank financing may provide better terms for the buyer and with more flexibility.

As noted earlier, there are many things that need to be considered regarding financing of an agency.  The best course of action is to talk with a trusted advisor, quite possibly a banker that has your interests in mind.  Gather the information available and make as informed a decision as possible - one that is best for you. 

As a senior commercial relationship manager, John Lisowski has more than 30 years of banking experience, primarily with community banks. John uses his expertise to assist SFB business clients with commercial loans, working capital financing, and small business financing including a variety of Small Business Administration (SBA) loans. He specializes in business acquisition financing, succession financing and financing for insurance agencies. To contact John, call 715.629.4077 or email jlisowski@sfbank.com.