In the current banking climate, seller financing may be the only way to close some transactions
Seller financing, where an owner lends the buyer of his newspaper most of the money to make the acquisition, is increasingly becoming a tool to get transactions closed. For years smaller newspaper sales were mostly seller financed (larger newspaper transactions have always been cash sales), but this tapered off in the last few years due to low interest rates and aggressive lending by banks and other lending groups. The near collapse of financing from these sources has created new interest in the seller-financed sale.
A typical seller financed sale structure looks like this:
•Cash down payment of 20% to 30% of the purchase price.
•Balance paid over 5 to 10 years at 5% to 7% interest per annum.
•Part of the balance may be in the form of a non-compete agreement which does not bear interest.
The Good News:
Seller financing allows buyers to make acquisitions without dealing with difficult or impossible traditional financing terms and rates. With seller financing, newspapers can be bought and sold that otherwise would not be saleable in the current market. Owners typically receive a higher purchase price when financing the sale, as a reward for their additional risk. Also, with these transactions the seller earns interest on a large part of the purchase price, as opposed to receiving cash at closing, paying income/capital gain taxes, and then investing what’s left over at low(er) rates. Sellers that have a use for cash may be able to borrow against the seller-held note, allowing the payments on the note to service the new loan for cash.
The Bad News:
Typically, the security a seller has in this deal structure is a first security interest in the newspaper he sold. If the newspaper deteriorates after the sale, and the buyer defaults on the loan, the seller may be faced with taking his newspaper back. Most sellers, particularly those at retirement age, don’t want to go back and operate the newspaper, which often is in poor condition. This means that choosing a high quality buyer, striking a reasonable deal, and obtaining the best possible guarantees are critical to a seller-financed sale. A good buyer/operator has a better chance of improving the newspaper, and a “reasonable” sale price gives the buyer a better chance at making payments and avoiding default.