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Should I provide seller financing to sell my business?

I noticed bizbuysell is promoting seller financed businesses. What are the advantages? Do I need to be seriously considering this?

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Answers (16)
Mel Vaz
Vested Business Brokers, Ltd.
Chief Operating Officer
Suffolk County, NY

This is a fair question and one that is asked by many of my clients. Providing seller financing is always a good idea, depending on how much of a downpayment the buyer is making. It is imperative that this amount be enough to make you comfortable with the risk. Typically, you should try to obtain at least 50% of the asking price as a downpayment, if not more. Remember three important points. 1. The buyer may be using their life savings of a significant portion of their assets to make this purchase. They are not going into this to lose money. They will move heaven and earth if they run into difficulty paying off the note because their alternative is unbearable. 2. Seeing that you are willing to hold a note shows the buyer that you have confidence in your business. 3. It is much easier to find a buyer who can afford a portion of the asking price with current liquid capital as opposed to finding a buyer who can pay the entire asking price with current liquid capital.

May 11, 2009
Marv White
Hartford County, CT
Premium Broker

The responses so far are spot on. The simple answer to seller financing is yes you should. As has been noted, you will likely receive more money for the sale and it is expected as part of the financing package. Additionally the buyer will see additional value in the continued relationship past the sale.

May 8, 2009
Sheila Spangler
Capital Strategies
Ada County, ID

Hi Wayne:
If you own a small business (meaning under $5,000,000 in revenues), you will most likely have to carry some portion of the sales price in a seller note.

Businesses of this size are typically financed by SBA loans. And now the SBA requires that the seller carry a note for goodwill exceeding $250,000. The advantages of carrying a note are that you typically will earn more for the sale. In other words, you get your price plus the interest on your note. And generally, you only pay taxes on the incremental payment amount you receive yearly. Be sure to check with your tax advisor though.

In this 'new economy', flexibility and creativity is the name of the game. So carrying a part of the sale is a good way to show good faith to the buyer as well as to the banker that will finance the rest of the deal. Good luck to you!

May 7, 2009
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FMI Inc.

Buyers always are more comfortable buying a business that the seller feels is good enough and will earn enough in the future to pay it out.
The seller takes the big gamble that the buyer will not loot the business and sell the assets before paying it out.
The answer depends on how anxious the seller is to sell.

May 5, 2009
Aron Culver
BTI Group / Business Team

If you are a target for a larger corporate buyer with good stock and cash, then maybe not. If you are considered a small business and a target for an individual, financial buyer then the answer, especially in this economy is absolutely you will have to carry. Just make sure you are protected by collateral, UCC, strong buyer credit and financials and get a personal guarantee and/or maybe even a deed against real property if there's significant equity.

Apr 30, 2009
Steven St
World Business Partners, Inc
Los Angeles County, CA

These were all very good answers.

Here are a couple of things I would like to add:

1. Get the best attorney that specializes in business acquisitions that you can afford. This more than anything will save you money and protect you in the long run from any trouble that may happen.

2. Get as much collateral as you can from the Buyer. Place a lien on their home, car and any other real assets they may have. Hopefully, the new Buyer will be successful in running the business but they could run it into the ground until it's worth nothing. Make sure you have other assets to go after to cover your note.

3. Make sure the note is fair and realistic - When I business starts to go bad you will most likely be the first person they come to to renegotiate price or terms. No one likes doing this. Make sure the note is structured in a way that makes it possible for the Buyer to be able to pay it and at the same time accomplish the return they need to run the business and live at a standard they feel comfortable.

4. Be open and available to the Buyer - At the very beginning, stress to the Buyer that you are there for them if they have any problems. Also, imply that you are willing to work with them and the note if they should come to a rough patch. The main reason why a majority of notes go bad is because of a lack of communication between the Buyer and Seller after the business is sold. It will save you a lot more trouble and headaches if you stay in contact with the Buyer after the deal closes and give them breathing room if they can not pay or make full payments.

There is a time where you don't want to give in and have to demand full payment, but find out what's going on before deciding how to handle it.

Just remember, the smartest Sellers I know realize that when a person buys their business, its the start of a relationship and not the end. Maintain a good and healthy relationship with your Buyer. It will save you lots of problems and misunderstandings down the road.

Apr 27, 2009
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One advantage to seller- financing is, you can use the note as collateral if you ever need immediate cash.

Apr 4, 2009
Fayaz Karim, MBA, CA
Subway Valuations, Business Searches
Orange County, CA

Great wisdom in many of these answers.
You will sell faster, for a higher price, and get the buyer loan approved on better terms
Mission accomplished-what are you waiting for?

Fayaz Karim, MBA, CA

Apr 3, 2009
Leon Parker
New Hampshire Business Sales, Inc.
President - co-owner
Merrimack County, NH

There are a whole host of reasons why Seller Financing is a desirable thing to do, as long as the terms are right.
You can usually get a higher price, the buyers will have more confidence in the business, you can usually benefit from tax savings if you structure the deal right, you will usually get a faster sale, you will potentially save the buyer a let of fees and make them stronger.
In today's market you will probably be called on by a lender to put up some or all of the goodwill financing, which can be a big part of the price. If you do that behind a commercial lender that leaves you in a weak position if the buyer fails. It often is best to provide all the financing and be in first place.
Also in today's market you can get 6% t0 8% interest on a seller note, where are you going to make that if you cash out and invest the money?

Apr 2, 2009
Lee Petsas
UBI Business Brokers
Orange County, CA

Due to the current state of the Credit Markets and Bank Financing, Seller financing is more important then ever in facilitating the actual close of escrow in a Business Sale. Everyone is aware of the difficulties in procuring financing on small businesses these days. Everything must be perfect. At one point a few years ago I think I could have gotten my family dog a loan. Today worthy buyers are still getting rejected. The bail out has not reached Main Street.

Therefore Sellers need to structure their notes properly to secure themselves as safely as possible. There are several factors to consider when carrying a Note. First of all the Seller needs to be realistic in terms of what the business can support in form of a monthly payment. No one knows this better then the Owner who has been operating the subject business. If the business has a monthly adjusted net profit or owner benefit of $5,000.00, you can not receive a $5,000.00 monthly payment. The Buyer will expect the business profits to make the payment and leave him some money too. Don’t set your Buyer up for failure.

Now to make the Sellers note as “tight as possible”, the following terms should be incorporated into the note:

Late Fee: Typical notes will begin having the first payment due 30 days from the close of escrow. A typical Late Fee clause is 10 days from due date and a penalty of 6% of the monthly payment. Personally I like 10 days and 10%. In my 28 years of experience in selling businesses, I’ve found out that if a Buyer is late once and I remind them of the 10% late fee they will do everything possible to not incur it again.

Collateral: Typically the business assets are collateral for the note. In this case there needs to be a written Security Agreement attached to the note. Most escrow companies will supply the Security Agreement. Read it. Not all are created equal. A good one will require the note holder’s (Seller’s) consent to transfer the note and note holder’s consent to substitute or replace any items of collateral (equipment) with like or comparable collateral. A list of equipment is necessary to be attached to the note and security agreement as these items are part of the Sellers overall collateral. All Security Agreements should also define a Breach so that enforcement of the Note and Security Agreement are “cut and dry’.

UCC-1 Financing Statement: In California this instrument perfects your note by registering it with the California Secretary of State. Make sure it is listed on the UCC-1 that “all fixtures and equipment are collateral, along with all inventories, cash, receivables, deposits and any other tangible asset that the subject business may have.

Reassignment of Lease as Collateral Security: This is one of the more important items and least known of for securing your note. This is a separate document. I used it all the time in the “old days” before all that loose bank financing and all cash deals. It’s very important this document be signed by the Buyer, Seller and Landlord.
In the sale of the business you are obtaining an Assignment of Lease to the Buyer from Seller. In that document the Seller is transferring all of his interest in the lease to the Buyer. If a Buyer were to default on the note, the Seller has to go back through the Landlord in getting possession of the business.
In a “Reassignment of Lease as Collateral Security” the Buyer and Landlord acknowledge that in the event a Buyer defaults on either the rent or note payment, the lease shall revert back to the Seller. The Seller gets the Landlord’s and Buyer’s consent to take back the premises up front before ever giving possession to the Buyer. Seizing your assets from the Buyer on a Default of the Note does not give you back possession of the Premise. This agreement terminates upon payment in full of the Sellers’ Note.

Apr 2, 2009
Ken Ducey, Jr.
Princeton Capital Strategies
Fairfield County, CT

No one wants to provide financing to someone buying their business. But, the fact is you will most likely get a better offer by offering finaning to the buyer. You need to compare all your offers which will no doubt have varying downpayments and decide what you are willing to do. Buyers will also typically not want to sign for the note personally, and that is where most sellers will draw the line.

Apr 2, 2009
Carol Berry Helms, President
International Business Brokers

To sell yur business, it is very important to offer some form of financing, either in a seller note or a consulting fee. This assures the buyer that you have confidence in your business on a go-forward basis. Most buyers are not interested in purchasing a business wherein the seller has no stake or risk. Offering financing will help your business sell much faster. Make sure your attorney covers you in the case the buyer fails or you and the buyer have a dispute.

Apr 2, 2009
Kathryne Pusch
ConsultKAP Inc./Business Brokers Network

Wayne-- With third party financing being about as rare as a unicorn right now, we are encouraging our seller clients to consider seller financing. This should not be an opened-ended "offer" to finance everyone who comes along. As a lender, you need to carefully underwrite that loan just like the bank! Is the buyer a good risk financially, experientially. . . check credit, and possibly do a background check. Consider your own debt that must be cleared, your tax situation, and your degree of motivation to sell "today." The deals that are getting done today require some flexibility of the part of all parties involved, but still must be a "win-win" so that everyone is happy enough to close. We have some articles and info on seller financing on our site. Good luck with your decisions, KAP

Apr 2, 2009
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Capital Business Brokers
Business Broker

Offering Seller Financing will make your business easier to sell but you need to be sure the new buyers are capable of continuing your success or you run the risk of them defaulting on the loan. Maybe a good solution is to offer partial seller financing and see if an SBA Loan can provide the rest.

Apr 2, 2009
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Nila Inc.

Also keep in mind that through creative strategy owner financing can actually lead to higher profit margins. Things such as discount note buying make it easy to consider seller financing(especially when real estate is involved) because it allows you to be flexible on the financing and still cash-out within a couple of years.

Apr 2, 2009
Carl J. Cusano, MBA, CBI
Capital Business Advisors, Inc.
Albany County, NY
Premium Broker

Offering seller financing will greatly increase your chances of selling your business. Over 75% of small to mid-sized business sales involve some level of seller finacing. It can provide the seller with some tax benefits by taking payments over a few years. It most importantly gives the buyer some assurance that the owner feels strongly enough about the future prospects of the business that he/she is willing to finance part of the transaction.

Mar 28, 2009