Seller Financing: What It Is and When It Makes Sense in a Business Sale
In a significant percentage of small business transactions, the seller doesn’t receive all of their money at closing. Instead, they accept a seller note, also called seller financing, where the buyer pays a portion of the purchase price over time. For many deals in Northeast Florida, seller financing is not just common; it’s the mechanism that makes the deal possible. Here’s what you need to know.
What Is Seller Financing?
Seller financing means the seller acts as the lender for a portion of the purchase price. The buyer makes payments to the seller over an agreed term, typically two to five years, at an agreed interest rate. The note is secured by the business assets, meaning if the buyer defaults, the seller can potentially reclaim the business.
Why Buyers Want Seller Financing
Seller financing reduces the cash a buyer needs at closing, makes SBA approval easier in some cases, and, importantly, signals that the seller believes in the business enough to leave some skin in the game. When a seller is willing to finance a portion of the deal, it gives buyers confidence that the seller isn’t just getting out while the getting is good.
Why Sellers Should Consider It
Deals with seller financing often close at higher purchase prices than all-cash deals. A seller willing to carry a note gives buyers payment flexibility, which can translate into a more competitive offer. Seller financing also creates an installment sale for tax purposes, which can spread capital gains tax liability across multiple years.
The Risks for Sellers
The primary risk is buyer default. If the buyer can’t operate the business profitably and stops making payments, the seller has to decide whether to take the business back or pursue other remedies. Mitigating this risk starts with thoroughly qualifying the buyer before you accept their offer.
Typical Seller Note Terms in Small Business Sales
In SBA-financed deals, the SBA typically requires a seller note of 10% of the purchase price if the buyer’s injection is at the minimum. In non-SBA deals, seller notes often represent 20% to 40% of the purchase price. Terms of three to seven years at 6% to 8% interest are common in the current market.
If you’re thinking through deal structure for a potential sale in Northeast Florida, contact Ryan C. Winter for a confidential consultation.
Related Reading
- Should I Use a Business Broker to Sell My Business in St. Augustine?
- Should I Use a Business Broker to Sell My St. Augustine Business?
- How to Increase the Value of Your Business Before You Sell
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