Understanding Sales Price vs. Borrowing Limitations
How Buyer Financing Limits Can Impact Your Net Proceeds
When selling your business (for example, a funeral home), a broker might boast about fetching a higher sales price. But remember: buyers are constrained by how much they can finance, especially in small and mid-sized business acquisitions. No matter what price a broker thinks they can get, the deal ultimately hinges on the buyer’s borrowing limit and available cash. If you’re working with an expensive broker who charges a high commission, a “record” sale price won’t mean much if a buyer can’t actually pay it – and those hefty fees will further erode your net proceeds. In short, focus on what you keep, not just the headline price.
Let’s break down the key points
1. Buyer’s Borrowing Limit Matters Most
Most buyers use financing, not cash. Lenders typically cap the loan amount based on the business’s cash flow—usually about 3–6 times annual cash flow (or EBITDA). For example, if your funeral home generates $500,000 in cash flow, a buyer’s loan might max out at $3 million. Any price above this limit means the buyer must bring extra cash, which is rarely realistic.
Note: External factors can tighten or loosen this cap. For instance, when interest rates rise, buyers qualify for smaller loans, directly limiting how much they can pay for a business. Conversely, lower interest rates or additional seller financing can increase what a buyer can afford, but only to a point. Ultimately, cash flow determines debt capacity, and that determines the realistic sale price range.
2. Higher Sales Price ≠ Higher Proceeds
Even if a broker claims they can get you a higher sales price, if the buyer can’t finance above their borrowing limit, the deal often falls apart or the price is negotiated down. Overpricing your business is a leading reason sales fail—and you could lose qualified buyers.
3. High Broker Fees Reduce Your Net
It’s not just the gross price that matters – what will you net after fees? Broker commissions are usually a percentage of the sale price, often around 5%–10% for small businesses. That means the higher the price, the more you pay the broker in absolute dollars. If you’ve hired an expensive broker (say, 10% commission) versus a more standard 5% commission, that difference drastically cuts into any extra money from a higher sale price. In other words, a big sale number can be quickly whittled down by a big commission.
For example: Suppose the broker manages to get a $3.3 million sale price for your business, and the buyer can somehow meet that price (we’ll examine how in a moment).
- Expensive Broker (10% commission): Broker fee = 10% of $3.3M = $330,000.
- Standard Broker (5% commission): Broker fee = 5% of $3.3M = $165,000.
That’s a whopping $165,000 difference in fees. Now, look at your net proceeds:
| Sale Price | Broker Commission | Broker Fee | Net Proceeds to Seller |
|---|---|---|---|
| $3,300,000 | 10% (High-commission broker) | $330,000 | $2,970,000 |
| $3,300,000 | 5% (Lower-commission broker) | $165,000 | $3,135,000 |
Despite the identical sale price, you would take home $3.135M with the 5% broker, versus only $2.97M with the 10% broker. The high-commission broker’s cut effectively wipes out an extra $165K that could have been yours. In fact, in this scenario the “premium” price achieved by the expensive broker doesn’t translate to a better outcome – you end up with less money in your pocket than if you had a lower-cost broker at the same price. Always remember that broker fees come out of the seller’s proceeds, reducing what you take home. And if a broker is charging an unusually high percentage (or adding hidden fees on the side, the impact on your net can be even more severe.
4. Borrowing Limitations Set the True Price
If a buyer can only get a $3M loan, but the broker sets a price of $3.5M, where does the extra $500K come from? Usually, the price is renegotiated lower, or the seller ends up financing the difference—adding risk and reducing your cash at closing. Aim for a price buyers can actually finance.
5. Focus on Your Net Proceeds
The bottom line: Net proceeds matter more than the headline price.
- Know the buyer’s limit: Base your expectations on what a qualified buyer can actually finance (often capped at ~4–6× cash flow).
- Beware of unrealistic promises: If a broker claims they can far exceed typical valuations, ask how the buyer will fund that. Overpricing can lead to wasted time.
- Mind the fees: Consider how different commission rates will affect your net. Sometimes a slightly lower price with minimal fees yields a better outcome than a higher price eaten up by commissions.
- Prioritize net over gross: At the end of the day, the net proceeds are what you retire or reinvest with. Optimize for that figure.
By keeping these principles in focus, you’ll make informed decisions that protect your interests. In the world of business sales, a fair, financeable deal that maximizes your net profit beats a notional high price every time.
For more tips, see Understanding Hidden Broker Fees and Why a Bird in the Hand is Worth More.
FAQs: Selling Your Funeral Home & Broker Commissions
1. Why is the buyer’s borrowing limit so important when selling my funeral home?
The buyer’s borrowing limit determines the maximum amount they can finance based on your business’s cash flow and financial performance. If your sale price exceeds this limit, the buyer must pay the difference in cash—which is rare—or you may have to lower your price. Pricing within these limits increases your chances of a successful, stress-free sale.
2. Do higher broker commissions guarantee a higher sale price?
Not necessarily. While some brokers may claim they can secure a premium price, a higher commission usually means less money in your pocket. What matters is your net proceeds after all fees—not just the headline sales price.
3. How are broker fees usually structured in funeral home sales?
Broker fees are typically a percentage of the final sale price, ranging from 5% to 10%. Always ask for a detailed breakdown of what’s included and compare total costs before choosing a broker.
4. What happens if my funeral home is overpriced?
If your asking price is higher than what buyers can reasonably finance, your listing may stay on the market longer, attract fewer offers, or result in last-minute negotiations. Working with an experienced broker ensures your business is priced for the market, attracting qualified buyers and reducing time to sale.
5. How can I estimate my net proceeds from the sale?
Net proceeds are your total sale price minus all fees, broker commissions, and any outstanding debts. Request a detailed estimate from our team to see exactly what you’ll take home.
Ready to Maximize Your Funeral Home Sale?
At 4BSF, we believe your legacy deserves the best outcome. Our team combines industry expertise with straightforward advice—no hidden fees, no inflated promises.
Contact us today for a complimentary, confidential consultation and see how much you could really net from your sale.
- Call us: (913) 343-2357
- Email Us: info@4bsf.com
- Request a free valuation: Fill the form on Contact us page
- Explore more seller resources: Sell Funeral Home
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