An Overview of Seller Financing

Helen Lamb
. June 20, 2020

Author: Al Fialkovich, Managing Director of Transworld Business Advisors

Published: March 15th, 2017

Almost 90% of business owners have never sold a business before. So if you are at the start of your research on how to sell your business and haven’t got a clue where to start, likely you are not alone. One of the many terms thrown around in discussions surrounding business acquisitions or business sales is seller financing. This term is one that almost immediately solicits a negative reaction from most sellers, but it should not be feared! It should be learned and understood as a tool to help sell your business.

The majority of businesses that sell today include some percentage of owner financing. With a rejection rate of about 80%, the SBA application process is often not an option for many businesses and buyers. Businesses that advertise seller financing along with their sale generate significantly more inquiries as well as a 15% higher sale price (estimation provided by Bizbuysell.com). There are many benefits, as well as some risk, to seller financing, so it is important that both the buyer and seller feel comfortable in the transaction.

In the following discussion, I will address common questions related to the subject of seller financing in hopes of opening up the discussion for future sellers and their buyers.

What is Seller Financing?

Seller financing is a loan provided by the current owner of a business to the new owner of said business.

Why Seller Financing?

Buyers negotiate seller financing for a number of reasons. First, they may be unable to afford the business at the full asking price. Second, the business transaction, as is, will not qualify for a traditional loan. Finally, there may be a level of uncertainty that the business will continue to be successful without the previous owner at its helm. So an owner’s willingness to finance a portion of the sale often gives that business an edge over the competition, by removing some of the buyer’s uncertainty.

How is the Seller Protected?

It is important for a seller financed transaction to be handled by professionals who can offer advice and construct documents that protect both the buyer’s and seller’s interests. Typically, a promissory note is drawn up that illustrates the details of the agreement. This note includes the recourse that the seller can take if a buyer defaults on the note. In the sale of a small business, the most likely scenario is that the seller would have the right to take their previously owned business back into their possession. Additional recourse avenues could be using the assets of the business as collateral or using a personal guarantee from the buyer. Utilizing a professional advisor to construct the terms of the promissory note will ensure that recourse actions are well structured.

What Other Terms Are Outlined in the Promissory Note?

The terms of the note are constructed in order to give the buyer adequate time to repay the note. Payments must be in an amount that the buyer can afford from the business income while continuing to run the business at an optimal level. The last thing either party wants is for the loan terms to constrict the buyer and eventually put them out of business. For this reason, the term length of seller financing varies depending on factors including: size of the loan, revenue of the business and the capital investment of the buyer. The interest rate charged on a seller financing note is typically in line with current banking rates.

If you are considering the sale of your business or have further questions on the subject of seller financing, please contact Transworld Business Advisors of Denver at www.tworlddenver.com.

This article was written by Al Fialkovich, the Managing Director of Transworld Business Advisors of Denver. Transworld is the top business brokerage firm in Colorado. Our team of business brokers have the most and widest range of business listings for sale, inclusive of 100+ listings annually. Our service area covers the state of Colorado, focusing on the Denver Metro, Boulder and Golden areas. We assist visionary entrepreneurs to buy a business or sell a business in Colorado, specializing in helping family-owned and closely held businesses with their strategic plans for the future.

info@tworlddenver.com I (720) 259.5099 I www.tworlddenver.com