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Writer's pictureMark Hartmann

Understanding Seller Financing 101


Graphic illustration showing two hands in a transaction over a small business sale. One hand passes a stack of dollar bills while the other hands over a miniature business storefront with a key, symbolizing seller financing. The scene is set against a dark green background, emphasizing the financial exchange and transfer of business ownership.

The sale of a small or medium business might appear overwhelming if you have not done it before. Understandably, the seller and buyer both want the best deal possible. Also referred to as owner financing, seller financing is one way that can be achieved. With the seller essentially acting as the “bank”, the buyer is able to make payments on a loan over time. In today’s economic climate, finding creative financing solutions is attractive to all parties. Here we’ll review what seller financing is and the benefits and risks.   


What is Seller Financing? 


Seller financing is essentially a loan from the seller to the buyer for part of the purchase of the business. Like a typical loan, the buyer is able to pay back the loan over time with interest. However, the terms of the loan are tailored to the situation and can be more creative than banks typically allow. 


Financial institutions like banks, credit unions, and other lenders provide what is called business acquisition loans. These loans will usually allow longer repayment terms and potentially larger loan amounts than a seller might be comfortable with. This would allow buyers to finance more of the purchase price. On the flip side, business acquisition loans usually have stricter qualification criteria and repayment terms. 



Benefits of Seller Financing 


For the Buyer: 


  • Easier Approval Process: Buyers can avoid the strict requirements of traditional lenders and get a loan that they possibly would not be able to acquire otherwise.  

  • Flexible Terms: You are able to negotiate terms that suit both parties, including the repayment time period, interest rate, and installments. 

  • Conserves Cash: This allows buyers to conserve cash for other needs.

  • Instills Confidence: A seller that is willing to offer seller financing 


For the Seller: 


  • Wider Pool of Buyers: This opens up the pool and can attract more buyers by offering more financing flexibility than if they only offered a sale with traditional lenders.

  • Passive Income Stream: Financing a loan allows the seller to have a steady income from interest. 

  • Possible Higher Sale Price: The increased flexibility for the buyer can allow for negotiating a higher price. 

  • Expedited Due Diligence: The idea of seller financing often puts buyers at ease that the seller is confident the business produces enough profit to pay back the loan and, therefore, reduces the due diligence process.


Risks and Considerations 


For the Buyer: 


  • Higher Interest Rates: Seller financing often comes with higher interest rates, due to the risks the seller is taking on, compared to traditional loans. 

  • Risk of Accelerated Payment: Balloon payments, a large final payment on a loan, can create financial strain if the buyer is not prepared. 

  • Limited Legal Protections: Because the loan is not through a traditional institution, there is less regulation and legal recourse compared to traditional financing. 


For the Seller: 


  • Risk of Buyer Default: There is a chance the buyer defaults on payment obligations.

  • Administrative and Legal Costs: The seller needs to remain involved with ongoing management of payments, as well as possible legal action if the buyer defaults. 

  • Delayed Payout: The seller doesn’t receive the full purchase amount upfront and this can be an issue if they need the full cash value immediately, especially if the loan amount is a higher percentage.  


Taking into account the benefits and risks, seller financing could potentially be the right move for your business. It can allow unconventional loans which benefit both the seller and buyer. This option is well worth exploring with the right advisors. HartmannRhodes can walk you through this process and help you figure out if seller financing is right for you. 




 
Mark Hartmann - CEO of HartmannRhodes

Mark Hartmann is a three-time Inc 500|5000 CEO with a rich sales, operations, and leadership background in the insurance, financial services, and healthcare sectors. With extensive experience growing and selling his own businesses, Mark leverages his expertise to help owners grow and sell businesses valued at $1M —$25M. He’s earned a Master of Business Administration from Eastern University, a master of science degree in organizational change management from St. Elizabeth University, and a graduate certificate in executive coaching from Columbia University. Mark’s professional certifications include Certified Mergers and Acquisitions Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB).

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