When I meet with business owners who want to sell their businesses, they often tell me that they want all cash. I let them know that an all cash offer is the best scenario and that a buyer who does pay all cash will expect a discount off the price. But with most transactions that I’ve handled, a seller will usually carry a note. Buyers rarely pay all cash, they usually get financing through an SBA loan, a bank loan, loans from family and friends, or will have the seller hold a note.
Most of the business sales that I have brokered, and one of the most common ways a buyer can finance a business, is by having the seller hold a note. Buyers will usually put a down payment of around 50% and have the seller hold a note on the remaining balance. Usually the note will be for 3-5 years with interest.
If a buyer does apply for bank loan, they'll need to be pre-qualified. In order to get pre-qualified, they will need to provide information on the business to the bank, they will also need to show a personal financial statement and what collateral they have to secure the loan. Collateral can be the accounts receivables, inventory or equipment, equity in real estate, and other personal assets that are outside the business.
The benefits of seller financing includes the fact that the buyer knows that the seller will have some “skin in the game” and will help in making sure that the business stays healthy and growing. There is also a tax benefit for the seller because he won’t have a lump sum tax payment; his loan payments will be spread out over several years.
There are many variables to deal with when financing a small business. If I’m working with a motivated buyer and seller, and financing is involved, there is usually a way to make a business sale successful and a win-win outcome for both.