Seller FAQs: Owner Financing

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The first logical question is what is owner financing? In the most basic terms, Owner financing is a loan given to a Business Buyer that comes from the revenues of the business. The rest of the purchase price is covered by the Buyers down payment and other financing. While not always necessary, the majority of small to medium business transfers have some form of owner financing, about 60-90%, according to BizBuy Sell.com.

This stems from bank reluctance to finance business purchases. A major reason for such reluctance comes from all small businesses attempt to minimize profits in financial statements, making them look less profitable. Additionally, a bank cannot step in and manage a business if foreclosure becomes necessary. Both of these reasons make bank financing risky for the bank. However if the Business Owner is willing to, at least partially, fund the business purchase, this proves that the owner’s continued confidence in the success of the business.

Some Business Sellers are reluctant to provide financing, however owner financing can be beneficial for Buyer and Seller. With seller financing, you can attract more buyers and price the business higher because you are providing financing, which allows the buyer to pay for the business over a period of months or years. Many serious buyers will not even commit to buying a business that doesn’t offer seller financing.

What Protections Do Sellers Typically Demand in Exchange for Financing?

Sellers often place some or all of the following as conditions on the availability of seller financing:

  • Control of the business if there is non-payment.
  • Real estate as collateral.
  • A personal guarantee.

A seller’s biggest fear when providing seller financing is the buyer defaulting on the loan. To avoid this from happening, sellers generally want terms that give them the right to take back control of the business within 30 or 60 days of the buyer missing payment. However, the biggest assets of many small businesses are intangibles, often referred to as goodwill

How Much of the Purchase Price Will Seller Financing Cover?

Sellers will typically finance about 30-60% of the purchase price of the business, but every transaction is unique, and some owners may offer more or less financing. With the assistance of your CPA, or financial professional, and your Gateway Broker or Intermediary, they can determine the right amount of owner financing for your transaction.

 

 

 

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