Seller-Financed Business Transactions

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, and the seller expects to receive the money for the business in return. 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). Some sellers may maximize their ultimate purchase price by offering partial seller-financing to potential buyers.

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 from 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 have the buyer go through a cumbersome Small Business Administration (SBA)-backed lending process (which many business do no quality for), the best 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.

Seller-Financed Deals: 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.

Negotiate Length of the Seller-Financed Payment Schedule

The typical length of time for a seller-financed payment schedule is usually two or three years. Buyers want the payment schedule to be as long as possible as they will avoid risk and reduce their monthly or annual payments on the Seller’s Note. Sellers want the 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 wants a payment schedule of five or more 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 asset purchase agreement or its addendums should specifically address the default terms and the security that the buyer is offering the seller to secure the Note.
  • Sellers should be aware that for SBA-backed lending deals, any seller-financed Note is invariably subordinate to the main lender.

Buyers Easier to Find When Seller Gives Some Financing

The business seller is ultimately in control of the sale 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 allows buyers to purchase the business who otherwise simply could not afford to do so. It also gives buyers the peace of mind that the seller has some ‘skin in the game’ which will motivate them to help the buyer after the closing. Moreover, if the business does not qualify for 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.