While the vast majority of small business sales (60-90%) include some form of seller financing, many people haven’t heard of such an arrangement prior to entering a small business transaction.
So, what is seller financing?
Quite simply, seller financing describes when the seller allows the buyer to pay a portion of the purchase price over an extended period of time, after the transfer of ownership occurs. The buyer typically also pays interest on this deferred payment amount.
The buyer meets the remainder of the purchase price with a down payment. While the down payment is usually made by the buyer with personal funds, it is common for the down payment itself to also include some form of third party financing.
Why use seller financing?
Quite simply, seller financing enables the seller to attract a larger pool of buyers and ultimately garner a higher purchase price. Without seller financing, the seller largely limits the potential pool of buyers only to those who can pay for the business out-of-pocket.
Importantly, seller financing also sends a strong signal with respect to the seller’s confidence in the future of the business. Not only does this help instill buyer conviction, but it also helps buyers raise third party financing when appropriate. Specifically, traditional lenders often prefer deals that include seller financing, as it evidences the seller’s confidence and commitment to a smooth transition and ongoing success.
What are typical seller financing terms?
- Covers 30 – 60% of the purchase price
- 3 – 7 years
- Typically paid back in monthly installments
- 6 – 10% Interest Rates
There are many more nuances to seller financing arrangements (seller protection provisions via collateral, typical contract terms, additional financing considerations, etc.) and we would be happy to answer any questions you may have.
Please don’t hesitate to reach out and we can set up a free consultation via phone or email – whatever you prefer.