Dec 27, 2021

Seller Notes In Financing A Business For Sale

Will Simmons
Will Simmons
Transaction Advisor

Will is responsible for helping sellers market their businesses to prospective buyers and providing hands-on support from offer to close. Using his background in mergers and acquisitions at Wells Fargo, he drives value and provides clients with the necessary resources, best practices and advice for a successful sale of their business.

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This article is meant for business buyers. If you’re selling your business, read about seller financing from the seller perspective.

When buying a business, there are a variety of financing arrangements available to you. An SBA loan would likely be one of the first things that come to mind. Unfortunately, small business loans like the SBA 7(a) loan program can be difficult to qualify for and may not be enough to finance the whole purchase.

If your cash and other  sources of loans aren’t enough to finance the acquisition of a business, seller notes or seller financing is another avenue to explore. It may be worth considering even if you have enough financing from other sources, because it puts skin-in-the-game for the outgoing owner(s).

How a Seller Note Works

A seller note is a form of debt financing structured as an interest-bearing loan. In this case, the seller pays a portion of the purchase price as a promissory note, which is effectively a binding IOU. 

The note is a commitment that as the borrower, you will pay the amount owed through a series of debt payments. By allowing you to complete the purchase through deferred payments, the seller is effectively self-financing the transaction.

You make a down payment while the seller note covers the remainder of the sale price. The note includes the debt amount, term, interest rate and repayment schedule. Repayment lengths for seller financing typically range between three and seven years.

Seller notes can be the primary source of financing but are more often a means of completing the capital stack needed for the purchase. When they are the primary financing source, sellers will typically finance 30 to 60% of the purchase price. If you are looking to buy a business that lenders would ordinarily not be too keen to provide acquisition financing for, you may get seller financing closer to 60%. If you’re able to get additional financing from other sources, you should expect the seller to finance 5-15%.

At Beacon, we expect all of our business owners to be comfortable with seller financing 10% of the selling price or more.

Meeting

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What is Required of the Business Buyer

Sellers do not all have the same mindset or risk appetite, so each one will define the actual requirements and terms of the note depending on what they expect to get out of the transaction. Just like a traditional lender, the seller may require specific information of you beforehand such as:

Benefits of Seller Notes for Buyers

Looking

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Managing Risk in Seller Notes

The seller note will often contain multiple provisions to protect the seller. These risk management clauses may include:

Some Important Points on Seller Notes Interest Rates

Buyer Tips for Seller Notes

If you are contemplating seller financing for your business acquisition:

Conclusion

A seller note could just be how to bridge a financing or valuation gap in the acquisition of that small business you are interested in. Seller financing benefits both you and the seller. It can be structured in line with the specific requirements of your transaction. Understanding the structure, benefits and risks of seller financing is critical to extracting optimal value from it.

Interested in buying a small business?

Subscribe to our Buyer Updates for early access to new listings and the latest resources for navigating small business acquisitions.