Seller Financing Do’s & Don’ts

Seller financing greatly increases the likelihood of a successful transaction. But it’s not without risk.

Here’s what sellers need to consider before agreeing to seller financing.


Assess the Risk
Seller financing ties you to the business long after the sale is completed. If the new owner fails, you could lose interest and income, and incur additional debt-related penalties. Evaluate an owner-financed sale as an additional business decision beyond just selling. This is a risky investment, and one that requires you to consult experts and do your due diligence.

Leverage the Benefits
The note is an interest-earning investment. A buyer who is a good investment means you may reap substantial benefits. Don’t treat financing as a desperate attempt to hold the business. View it as a business investment and a resource.

Your willingness to hold the note should increase the final selling price at the outset. Partially financed sales can increase the price by 15% over a cash sale. This willingness to finance the sale then becomes something you can leverage as a bargaining tool in sales negotiations.

Financing also offers the potential to multiply the principal value with future interest payments. A financed sale offers a significantly higher rate of return than other investment vehicles. Charge the amount of interest you feel is appropriate, and remain firm in your offer.

Advertise Your Willingness to Finance
Seller financing can draw in more buyers. If you’re comfortable with financing a portion of the sale, include this information as part of your marketing plan. This allows you to attract a larger pool, that may include an ideal buyer who would otherwise be unable to secure financing or purchase the business. Listings containing information about owner financing tend to get a higher volume of traffic than those that leave out this information.


Waive the Down Payment
Some buyers may hope to weasel out of a down payment, but a hefty down payment minimizes risk. Business loans typically require a much higher upfront payment than home mortgages, which often require just 15% or less. Make sure the down payment apportions a fair share of the risk to the buyer.

It’s generally safest to finance no more than 20-50% of the sale price. If you finance more than this, there must be a compelling reason to do so. For example, if you sell to a family member, you might want to finance more than is typical. Just remember that your risk increases with your financing commitment.

Don’t Do it Yourself
Just because you’re financing the sale, you don’t have to do everything yourself. Seek qualified, competent professional advice from someone you trust. Don’t turn this into a do-it-yourself transaction. You’re already assuming a hefty risk by taking responsibility for a portion of the buyer’s investment.

A loan between a buyer and seller offers limitless variations and structures. These require the input of professionals who can ensure fair collateral, airtight agreements, and a sound financial strategy. Don’t sign anything until you have sage counsel from someone you trust.

Don’t Be Pressured
Trust your intuition. The fact that a buyer pushes for a seller-financed deal does not mean you have to give one. This is especially true when a buyer wants financing because they can’t secure it from traditional lenders.

No matter how much you want to sell the business, caving to buyer pressure is a recipe for disaster. Don’t rush into a deal, and don’t allow yourself to be bullied. Instead, step back and do a reality check. If you don’t feel fully comfortable with financing the purchase, walk away. A better buyer will emerge—but only if you walk away from problematic deals.

Prior to purchasing IBEX, Chuck Harvey spent 35 years as CEO, CFO and consultant to the Fortune 500, Middle Market, Mainstreet and in the Start-up community, including spending time at PepsiCo & Price Waterhouse Coopers. During that time, Chuck oversaw three dozen buy-side / sell-side transactions on three continents, including a $35M sale of a Texas digital photography pioneer to a $1 Billion Japanese conglomerate.

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