Why Seller Financing is a crucial factor in “Selling Your Business”

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Why Seller Financing is a crucial factor in “Selling Your Business”

Hello, on behalf of Florida Business Exchange, welcome to ‘Reasons for owner financing’.  This is one in a series of videos from Florida Business Exchange that cover the basic steps you will climb in selling your business.  A critical step in this process is seller financing.  In today’s tight credit market, a business owner must understand that banks and buyers may require the seller to assume a portion of the risk as a condition of the sale.  But, before I cover the frequent need for seller financing, I’d like to thank you for your interest in working with Florida Business Exchange to help you sell your business.

Now, let’s discuss the frequent need for seller financing.  One of the questions our intermediaries will ask the business owner when we prepare a listing agreement is how much of the transaction will they be willing to seller finance.  Even though you may not be a bank, you will need to keep an open mind about some amount of seller financing.  In fact, by agreeing to hold a note for some portion of the transaction, you will not only improve your ability to sell, but you will likely sell at a higher price.

So, what exactly is seller financing?  Seller financing is when the seller holds a buyer’s note for a portion of the sale of their business.  The buyer’s note is a contract between the buyer and seller specifying the loan amount, interest rate, and the number and amount of installments until the loan is repaid.  The buyers note is referenced in the purchase agreement and it, along with the security agreement, is always drawn by an attorney and then signed and acknowledged by the buyer both corporately and personally.    Often, the buyer’s note is accompanied by a security agreement, or personal guarantee giving the seller the ability to lien any and all of the buyer’s assets in the event of default.  This lien, including a list of assets, is recorded in the local county, and in the state registry as collateral for the loan.

In addition to improving the probability of selling your business, and maximizing the price of the sale, there are other benefits to seller financing.  One potential benefit is the tax ramifications.  If you take all cash at closing, you will likely be paying a larger tax bill for capital gains.  Taxes are a very important consideration, so before you take a firm stand against seller financing, you should discuss the terms of any transaction with your CPA or tax attorney.  You must also consider that seller financing will require a lower down payment to purchase your business.  This will help exposure your business to more potential buyers, and often, this may be the only possible way a buyer can purchase your company.  Under present market conditions, banks are reluctant to lend money even for hard assets, and lending for goodwill is very infrequent without a portion of seller financing included.  Even though SBA loan guarantees are readily available, they do not guarantee a bank will be willing to write a loan for your transaction.  In many cases, the banks are requiring the seller hold a note for at least 20% of the transaction price. This is often referred to as requiring the seller to have “skin in the game.”   So, if you really want to sell and receive full value for your business, you may have no alternative but to accept seller financing.

There are some additional considerations that will help protect your investment in seller financing.  One consideration is to make sure the buyer makes a large down payment.  The more skin the buyer has in the game, the more likely they are to ensure the business will be run successfully and you will receive your payments.  A second consideration is to lien the assets of the business.  If the buyer defaults on the note, this gives you the ability to step back in and take over the business.  A third consideration is to make sure you have a qualified buyer.  At Florida Business Exchange, we do our best to make sure buyers are qualified to run your business.  We assist you in the reviewing prospects for your business.   And, the final consideration is to verify the buyer’s credit worthiness.  You want to make sure the buyer has a sound financial history, the assets necessary to purchase the business, along with the working capital to meet the needs of the business during the transition and training period.  Addressing these considerations should ease your mind about seller financing.

Again, on behalf of Florida Business Exchange,  I would like to thank you for listening.  If you have any questions regarding preparing your business for sale, or the amount of seller financing that will be required to sell your business, please do not hesitate to contact your Florida Business Exchange intermediary for a complimentary cunsultation. I wish you the best of luck in pursuing your after sale dreams, and having our team of professionals helping you through the process.


  1. David Wood says:

    How much amount should be paid for seller financing?

    • herb.stewartson says:

      Great question! There should be a balance between the two side. The buyer should be contributing enough downpayment that they are committed to achieving success. We call it “skin in the game.” On the other side, the seller should be providing enough financing that they are showing their confidence in the business’ ability to continue on after the transition. That being said, the most successful deals have seller financing available for between 40 – 60% of the purchase price. In the event of seller financing, always make sure that a competent business atorney is used for the closing and that there is a UCC (lien) placed on the assets of the business until the seller note is paid off by the buyer. It is also customary that the buyer personally gaurantee the note. I hope this answered your question.

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