Seller Financing: What you need to know when selling your busines

When SBA loans look like a shooting star that are tough to get, Seller Financing swoops in as a great alternative. If you aren’t familiar with this term, also referred to as a "seller note," don’t worry; we are here to uncover the meaning of this fancy phrase. In a nutshell, Seller Financing is a technique used in negotiating business deals where the seller defers collecting part of the purchase price to a later date, usually 1-5 years. This approach is very common, showing up in a whopping 80% of all small business transactions. 

But why do this in the first place? Well, from a strategic standpoint, Seller Financing can yield multiple benefits, depending on which side of the deal you’re on:

Tax Efficiency: 

By spreading out the collection of proceeds, sellers can defer parts of their tax bills over longer periods. It could even help them avoid hitting higher tax brackets by pushing income to a future tax year. 

Value Maximization: 

In an environment where businesses can take several months to close, Seller Financing can accelerate the process by offering to break up the payments over time and temporarily share the risk of transition with the buyer. While you may be thinking, “that sounds like more of a win for the buyer than the seller”, the truth is, this may be the difference in being able to successfully get to closing, or not being able to sell at all. 

It's also a lucrative opportunity for the seller! These financing notes often include an interest component for the seller and, on top of that, a higher purchase price can usually be obtained. 

Seller Financing terms generally require a significant down payment— At least 50% is customary for small businesses, while 10% to 30% is customary for middle-market deals. 

To mitigate the risk of non-payment, sellers should:

• Craft robust promissory notes covering explicit terms regarding defaults and late payments.
• Potentially file a lien against the business assets
• Consider collateralizing the personal assets of the buyer in certain circumstances.
• For buyers seeking to persuade sellers to finance the sale, transparency, and proof of financial stability are essential. Personal guarantees can serve as strong incentives for sellers.

In conclusion, Seller Financing is an essential instrument in the sale of small to mid-sized businesses. As you’ve now learned, it's a strategic element used by both buyers and sellers in an attempt to maximize their benefit in the deal. It makes the seller have skin in the game for a period of time in exchange for a potentially higher price. These types of arrangements can initially scare first time sellers who would much rather close the deal and walk away without any “ties”; however, if it means getting the deal done and maximizing value, a well-protected Seller Financing note may just be the smartest move a seller can make.   

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