Seller-Financed Business Transactions

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Seller-Financed Business Transactions Not for Everyone

The great majority of business sellers deservedly want and expect to get paid in full at closing. Once a deal closes, the buyer receives the business being sold, and the seller expects to receive the money for the business at closing. In reality, however, many business deals are partially seller-financed. This means that the seller receives a portion of the purchase price in cash at closing, and finances the balance. The balance (or Note) is owed by the buyer to the seller and is paid over time (usually two or three years). Although many sellers will refuse to engage in this type of transaction, other sellers will find that a seller-financed business transaction will work for them and allows for a successful deal to occur.

Many Buyers Want Seller-Financed Business Transactions

  • It is very important that a business seller take a step back and think about why a business buyer may ask the seller to finance part of the purchase price.
  • First, a business buyer often wants the seller to have ‘skin in the game’ and be more willing to help the buyer with the post-closing transition.
  • The transition after the closing may include introducing the buyer to key customers and suppliers, teaching the buyer necessary skills to run the business properly, and ensuring good relations with employees.
  • If the seller is owed money to the buyer (in the form of seller-financing) after the closing, then the buyer knows that the seller is far more likely to assist the buyer after the closing with the transition.
  • Additionally, many buyers simply do not have the entire amount of funds necessary to buy the business.
  • Rather than go through a cumbersome SBA lending or other external lending process (which many business do no quality for), the best and quickest way to get a deal done is for the seller to step in and finance part of the purchase price.

Sellers Should Negotiate Terms of Seller-Financing

As with all aspects of a business transaction, the terms of the possible seller-financing is subject to negotiation. It is imperative that a professional business broker educate a business seller about the key aspects of seller-financing. The structure of a seller-financed deal should be addressed and negotiated in the Letter of Intent or the buyer’s initial offer, and not in the final purchase agreement. This way there are no surprises and both sides are in accord with this critical aspect of a business deal.

Business Sellers Typically Receive At Least 50% of Purchase Price At Closing

The most important aspect of negotiating a seller-financed business deal is the amount down at closing. Some buyers may insist on only giving a small fraction of the purchase price (as little as 10%) to the seller at closing, with the balance to be seller-financed. These deals are typically to be avoided unless the seller simply wants to walk away from the business. The more money the buyer pays at closing, the better it is for the seller. The seller rightfully wants to gain a measure of financial security at closing, and the buyer should also have ‘skin in the game’ by using their own funds in a significant way at closing. The typical rule of thumb is that a buyer should reasonably expect to put down at least 50% of the purchase price at closing.

Business Sellers Typically Will Want to Shorten the Length of the Seller-Financed Payment Schedule

The normal length of time for a seller-financed payment schedule is usually two or three years. Buyers want this payment schedule to be as long as possible because it means their monthly or annual payments will be less. Sellers want this payment schedule to be as short as possible because it means the monthly or annual payments will be higher and the seller will get paid in full in a shorter period of time. If a buyer is wanting a five year or more payment schedule (such as ten years!), then that is usually a red flag and must be negotiated by the seller.

Business Sellers Will Want UCC Lien on the Business After Closing

  • In the absence of a personal guaranty from the buyer (which is very rare), the seller will want to secure their seller-financed Note from the buyer by virtue of placing a UCC Lien on the business after the closing.
  • A UCC (or Uniform Commercial Code) Lien gives the lien holder legal rights over the business.
  • Normally a UCC Lien will prevent the buyer from re-selling the business or even getting other forms of financing unless or until the lien is paid off.
  • Essentially, a UCC Lien gives the seller collateral (in the form of the business that the lien is placed against) for the Note that the buyer owes the seller.
  • It is very inexpensive to place a UCC Lien in Florida (only $35) but all sellers should consult with an attorney in order to properly place the lien and – if necessary – execute the Lien in the event of a default.
  • The purchase agreement (or the Security Agreement which spells out the terms of the seller-financed Note) should specifically address the default terms and the security (such as a UCC lien) that the buyer is offering the seller to secure the Note.
  • Sellers should be aware, however, that for deals backed by the SBA or other external lenders, any seller-financed Note is invariably subordinate to the main lender.

In General, Business Buyers Easier to Find When Seller Gives Some Financing

The business seller is ultimately in control of their business, and no one can or should force them to give seller-financing. In reality, however, it is far easier to find a business buyer when the seller is offering partial seller-financing of the purchase price. This ensures that the seller will have ‘skin in the game’ in order to assist the buyer after the closing with carrying out a smooth transition. Moreover, if the business does not qualify for SBA or external lending, then partial seller-financing may be the only realistic way for many buyers to purchase the business. So long as the seller carefully negotiates the terms of the seller-financing, then a seller-financed business deal may be the best chance a seller has for a successful closing.

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.

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