Seller financing is an attractive part of business acquisition. This happens where a business owner is willing to finance the buyer in the event of a business sale. The amount of financing usually covers part of the selling price. Combining that with a buyer's down payment or other source of financing can make all the difference when qualifying a prospective buyer. There are several instances where this setup makes the most sense to both parties involved, yet it's not the best option for all sellers looking for the successor. Here are some key things to know about seller financing:  

Ready to Sell? You Can Finance Your Buyer

Seller financing is often an attractive prospect because of the following benefits:

• When business owners finance buyers, there is room for flexibility and negotiating opportunities for the buyer. This might not happen in other cases, like financing through banks.
• The buyer obtains a degree of security in the long run and the seller continues to possess an incentive in having the business grow and perform well.
• The buyer can stretch up the payments for longer - like up to 10 years - to reduce the installments. This offers the seller equity in the business, granted the selling price is recouped through the business' continued profitability.

Both the buyer and the seller usually benefit from seller financing. Seller financing gives the buyer the capital they need to make the purchase happen and makes other lenders more likely to finance. For sellers, it brings to them more prospects and perhaps allows them to charge a slightly higher price for the business.

Apart from the benefits, seller financing has the following drawbacks:

• Very few business owners are willing to wait for a very long time to be paid off.
• Seller financing can add from between five to 25 percent of the marked price. This hike means that sellers typically lend at higher rates than a bank or financial institution.

 

Terms of Seller Financing

The following are the standard terms that occur on most seller financing deals;

• The seller financing deal is typically expected to last five to seven years 
• The seller's loan is expected to cover 30 to 60 percent of the purchase price
• The interest rate is projected to be six to 10 percent

For seller financing to be made available to a buyer, most business owners looking to sell would require the following:

• Real estate as collateral
• Personal guarantee
• Control for the business if payment is not made

 

Trusting a Business Advisor to Help You Finance Your Buyer

Is your head swimming with possibilities, or does all of this sound like too much work to finance your buyer? Consider partnering with a business advisor to act on your behalf. Such professionals are usually involved in business sales and work on behalf of the seller, yet have plenty of experience handling the buyer, too. It's a unique perspective to ensure both parties receive fair and clear direction on what is expected in a seller-financed transaction. 

As with anything in business, there is a process to financing buyers. Some of the steps a business advisor would take for your efforts include:

• Bill of sale
• Bulk sale documents
• Deal contract
• Promissory notes
• Letter of interest
• Non-compete agreement from the seller
• Consultation/employment agreement
• Security agreement
• IRS Form 8594