A business is for sale. Buyer and seller meet. It’s a match made in heaven. They’re ready to get a deal done. How is the buyer going to find the millions of dollars required to buy the business? Likely partially from you, the seller.
Here are three things you need to know about seller financing when crafting a deal to sell your business.
1. You should expect to carry a note
Most sellers of small businesses will finance some portion of the deal.
In most of The DVS Group deals, the standard amount is 10-20% of the total purchase price.
Being willing to finance part of the deal increases your credibility with the buyer, and more importantly, with the buyer’s bank. You prove that you have confidence in the buyer and the future of the business.
Extending seller financing puts additional teeth on promises you’ve made to the buyer – like the Non-Compete Agreement and the company’s representations and warranties. If damages occur after closing, then one of the best remedies is for the buyer to “offset” the damages against your loan – this means the buyer would reduce the amount of the seller note by the amount of the damages.
Carrying a note from the deal creates an additional tie to the new owner of your business that will last for years- just another reason to find a buyer that you trust and enjoy doing business with.
2. Your interest rate will be competitive, not outrageous
Your interest rate will be comparable to the bank.
It will be no more than 2.75% over prime if the buyer is using a SBA loan, and probably lower in a conventionally financed structure.
You can expect monthly or quarterly payments.
Here are a couple creative negotiation options related to seller financing interest rates:
- Since your buyer is likely concerned about having enough cash after closing, consider offering them an interest-only period for 90 or 180 days after closing. You will have just gotten a big check and probably won’t need the cash right away, so you can use this to negotiate for other concessions.
- Conversely, to accelerate repayment of principal, consider an escalating interest rate that goes up by several points after the first three to four years. Once your money gets to be more expensive to use, the buyer will find ways to refinance you.
3. Your terms depend on the type of deal
If the deal doesn’t include SBA financing, you are free to negotiate your terms almost any way you want.
But if it is an SBA deal, your terms will be nearly identical to the bank’s terms.
You can’t be prescriptive in seeking balloon or bullet payments from the buyer after a certain time-frame unless the bank is already repaid in full. The SBA will not allow other lenders to be paid down before them.
Although you are a co-financer, you will be subordinate to the bank and possibly to other lenders as well. Banks become uncomfortable if a junior lender (for example, you as seller financer) has too much power over the deal. Use your attorney to learn about enforcing the security agreement.
Don’t fear seller financing.
Yes – there are risks but when you don’t extend seller financing the risk that the deal will not obtain bank financing increases. Selling your business means carrying a note.