A Few Quick Thoughts on Using Seller Financing to Sell a Small Business

Seller financing is a common strategy in small business acquisitions to get deals done that otherwise would not be possible.  Simply put, seller financing is a loan made by the seller of a business to the buyer to cover all, or a portion, of the total purchase price for the business. 

Seller financing offers both benefits and risks for the parties involved with a small business acquisition. The primary benefit is that it provides buyers—who might not be able to obtain financing from a traditional lender—the ability to acquire a business and, as a direct consequence, greatly expands the pool of potential buyers for a privately-held business.  In theory, this is a classic “Win-Win” scenario.

The primary risk to the seller is two-fold:  (i) seller financing necessarily means that the seller is not getting as much cash at closing as would otherwise be the case (delayed gratification), and (ii) the seller is bearing the risk that the buyer will not repay the loan in a timely fashion. 

Because of these risks, a business owner offering seller financing should do a fair share of due diligence on the buyer (e.g., running a credit report of the buyer, asking for a personal financial statement, resume, and other pertinent information), before making a final decision. The seller, like any lender, should consider requiring collateral and a personal guarantee to secure the loan.

While every deal is different, tare some commonly accepted terms that can be a useful rule of thumb when looking to negotiate seller financing. Common financing terms include:

Loan Amount: Anywhere between 50-100% of the purchase price (in distressed sale situations, a business owner will often be very flexible when negotiating financing terms)

Term Length: 5 – 7 years

Interest Rates: 5% – 10%

Repayment Schedule: Monthly or Quarterly

From the buyer’s perspective, a buyer should expect some level of post-closing obligations, operating restrictions, and reporting requirements (but certainly fewer restrictions than a traditional third-party lender would require) to the seller until the loan is repaid.  Given the seller’s vested interest in the buyer’s post-closing success, one plausible benefit to the buyer is having the seller directly or indirectly involved post-closing, however passive or minimal that involvement might be.

In summary, if life were perfect, every selling business owner would get full asking price paid in cash at closing, but life is not perfect.  An owner’s willingness to offer seller financing on commercially reasonable terms can often be the difference in consummating a deal.  Finally, buyers and sellers should not underestimate the degree to which experienced advisors (e.g., a business attorney, accountant, and business broker) can help the parties structure, negotiate, document, and close a mutually beneficial transaction.  Reach out to Perkins Law with your small business acquisition and sale questions.