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FAQs About Seller Financing

FAQs about Seller Financing


Will I need to finance a portion of the business sale transaction?

Because we are very knowledgeable in SBA financing, in past years most of our transactions did not require seller financing.  Since the Great Recession which began in 2008, it’s become much more difficult to finance a transaction without some seller financing.

The key to avoiding seller financing is to have a very “clean” sale from the standpoint of the SBA’s loan evaluation process.  Among other things, that means the business should be priced right relative to the Seller’s Discretionary Earnings (SDE) so the purchase price will be acceptable to SBA lenders.  The SBA lenders will not accept non-business expense add-backs such as personal use of an automobile, personal travel expenses, or other types of personal expenses that are run through the company’s books.  If personal add-backs are significant, the bank may be using a much lower SDE to evaluate the business than the seller and buyer are using.  When that happens, the banks valuation of the business might fall short of the price agreed to between the buyer and the seller.  In such a scenario, a seller will must provide some seller financing or reduce the price.

If seller financing is required, rest assured that we can help you minimize the amount to be financed.  In many instances, seller financing can be limited to 10 to 15 percent of the purchase price.


Why should I consider seller financing?

Willingness to provide a minimal amount of seller financing can be the difference between getting the deal done and not being able to sell the business.  Because a large percentage of buyers prefer some seller financing, your business piques the interest of a larger pool of prospective buyers and can also help compress the time frame required to sell the business.  Willingness to participate by providing some financing instills confidence in the buyer that you believe in the future prospects of the business.  Some studies have determined that business transactions with seller participation in financing have commanded higher multiples (sold for higher prices) than those without seller financing.

In addition, you can probably negotiate a higher interest rate than you can earn on alternative investments.  And there may be tax savings by spreading the receipt of the selling price over a few years.



Is it true that financing for my business is almost impossible for a buyer to obtain?

No, but it does depend on the specifics of the business.  Because lenders prefer to spend their time on larger transactions, it is much harder to obtain financing for businesses with valuations less than $250,000.  Some businesses have obstacles that make it very difficult to obtain financing.  For instance, if one customer comprises 50% of your revenues, it’s very unlikely the lender will approve an acquisition loan.


I want all cash. Will I still be able to sell my business?

It just depends on the nature of the business and how “clean” the business is from the standpoint of a lender’s evaluation.  If you take an absolute stand against providing any seller financing, you may be unable to sell the business.  It’s definitely best to maintain some flexibility to provide a minimal amount of seller financing while hoping it won’t be necessary.



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FAQs about Business Exit Planning Considerations

FAQs about Business Brokers

FAQs about Listing Agreements and Fees

FAQs about Business Valuation

FAQs about Confidentiality, Advertising and Disclosures

FAQs about Business Buyers

FAQs about the Business Sale Process

FAQs about Facility Leases and Owned Real Estate

FAQs about Assets Included in a Typical Business Sale

FAQs about Negotiating the Price Terms and Structure of Offers

FAQs about Due Diligence

FAQs about SBA Loans for Business Acquisitions

FAQs about the Business Sale Closing Process