Should You Sell Your Small Business with Seller Financing?

The majority of small business sales these days involve seller financing. Why? There are several reasons.

One, with credit as tight as a vise, it's usually only deals of complete certainty that can attract financing from a bank. Two, buyers like seller financing. It assures them that you have confidence in the strength of your business and that you won't simply collect your money and drive off into the sunset. You'll stick around to lend advice and see that your business stays in business -- because if it doesn't, the seller won't be able to pay you the balance of your sale price.

But seller financing also has advantages for you, the seller. It usually ensures a quicker sale (banks aren't known for their quick action) and a higher price.

Meeting (Almost) Halfway

Seller financing is most common when the sale price of a business is too high for the buyer to pay cash (above $100,000) but too low for investors to be interested (below a few million dollars).

Usually the seller will finance 30 percent to 60 percent of the sale price. Some business owners will finance an even higher percentage. This sounds like a lot. And it is. But there are steps that you, the seller, can take to protect yourself.

First, keep in mind that, in this transaction, you're playing the role of a bank. So you should behave like a bank. Ask the buyer to secure the loan you're providing and to give a personal guarantee. This states that the buyer is making all of their personal assets available if they don't give you the agreed-upon payments and you have to foreclose. The guarantee should also be signed by the spouse, if there is one, to guard against any shift of assets to the spouse's name.

You'll behave like a bank in other ways, too. Your note will have a term, and the term will be around the same period as the term on a bank note. You'll be paid interest, although the amount will probably be less than a bank would get.

Here's one scenario. Say you sell your dry-cleaning business for $700,000. The buyer might put down $250,000, while you finance $450,000. The note may have a term of eight years, with an interest rate of 9 percent. You'll collect monthly payments, which will typically begin 30 days from the date of the sale.

Securing the Sale

There are several measures you can take to protect yourself when financing the sale of your business. You can ask for a personal guarantee. You can also ask for collateral and life or disability insurance (in case the buyer or any vital member of their team is injured or dies). You can also establish operational guidelines for the buyer to help them succeed -- and help ensure that you get paid what you're owed.

Seller financing is not an ideal way to sell your business. It would be far more appealing to collect your full price and move on with your life. But with credit as tight as it is these days, seller financing is likely the quickest, most profitable way to exit your business.