On July 26, the Fed raised interest rates another 0.25% after a brief pause. They also signaled that another raise may be coming. The move nudged the federal funds rate to a range of 5.25% to 5.5%, the highest level in 22 years.

If you’re thinking about selling your business within the next year, interest rates will have a definite impact on the number of buyers who will be able to offer top dollar for your company. Lenders look at a company’s cash flow closely; a buyer will have to be able to cover the company’s expenses, pay the new owner a reasonable salary, and be able to service the debt. As interest rates rise, the debt gets more and more expensive. Buyers will have to look for smaller companies to purchase or try to get the company they want at a steep discount.

That’s not good news for sellers. Even buyers who work through the SBA will be paying high interest rates. The SBA sets interest rate guidelines for lenders, which helps keep small-business owners’ borrowing costs low. But they are affected by the Fed rate hikes as well.

Interest rates for SBA 7(a) loans are the daily prime rate plus a lender spread. The spread is negotiated between the borrower and the lender and can result in either fixed or variable interest rates. However, the SBA caps the maximum spread lenders can charge based on the size and maturity of the loan.

The current prime rate is 8.5%. This means if a buyer is obtaining an SBA loan, they’ll pay close to 11%, assuming a rate between 2%-3% from the lender, depending on the size and term of the loan. Your business has to have enough cash flow to service the debt and run the company. If the numbers don’t pencil out, the bank won’t consider the loan.

Tight money shrinks the pool of available buyers for your HVAC business. If the trend continues, we could see more owner-financed deals. Owner financing means you take on some of the risk that would normally be taken on by the bank. In fact, you are functioning as a bank.

Most owners are reluctant to consider owner financing, for good reason. Firstly, most owners are selling to get out of the business; they’re ready to move on. Owner financing means you remain involved as an investor. The good news is that a seller’s involvement can ease the transition for the new owner, employees, and customers. They understand that the seller will have a financial interest in the success of the business over the next few years.

The Pros of Owner Financing

You may be able to sell your business for more money. With two lenders — you and the bank — the buyer can make a higher offer. Most owner-financed deals aren’t for 100% of the sale price; it’s usually a much smaller portion. You’ll be able to take out cash and leave the day-to-day operations.

You’ll earn interest on your loan just like a bank. The deal can create a reliable income stream for anywhere from three to seven years, depending on what you negotiate, You’ll likely earn more than you would putting your money in traditional investments.

You’ll probably be in a better tax position. Taking the full lump sum of the sale will likely push you into a higher tax bracket and subject you to higher amounts of capital gains taxes, which can be up to 45%.

The Cons of Owner Financing

You assume more risk. If the borrower defaults, you can take back your business, but you probably don’t want that — you sold it to get out of the business. And even if you take it back, it will be a distressed business. You’ll have lots of work to do to get it back into shape.

This probably wasn’t what you and your family thought would happen when you decided to retire. You’ll have to take time to explain the risks, get their consent and support, and make changes to your budget and plans.

If you do decide to pursue owner financing, you’ll have to perform all the due diligence the bank would, including looking at personal financial statements, doing credit and background checks, and more.

Owner -financed deals are more complicated than straight up sales; you’ll need to get lots of good advice from your accountant, investment advisor, and attorney. You’ll also need the expertise of an experienced business broker; they’ll be able to help you understand the deal and structure it so it’s fair and beneficial to both parties.

Owner financing is a common option for many business sales, but it’s not for everyone. It may, though, be one way of getting the full value for your business at a time when many sellers won’t.