The SBA has published new guidelines for lending, and one of the areas is in seller financing. Actually, many lenders already require the seller to participate in financing in all but the very strongest of deals, which isn’t an unreasonable stance. Although I know many sellers that would vehemently disagree with me on that.
In fact, this would be a good time for a war story. I met with a seller (a couple) who told me they would be happy with $800K for their business since another broker had been trying to sell it for that. I did a valuation and valued it at $900K, listed it there and had an offer within a month for $900K. However the offer included $80K of seller financing. I was very excited to bring them such an offer, and was crushed to get an earful from them about having to carry a note. I even called them on it, “But you said you would be happy with $800K for your business and I’m getting you $820K in cash up front”. That apparently didn’t matter any longer, and they were strongly opposed to any seller financing.
Since the business seller is completely and in all ways subordinate to the lender, the amount of seller financing should be minimal, but having some is a great way to make sure the seller is committed to making sure the business is a sustainable operation. Here is the language of the new SBA procedures:
“In addition, a lender should require as much seller-financing as possible with the seller-financing having a subordinate lien to the SBA-guaranteed loan on the business assets. A rule of thumb for the amount of seller-financing that should be required is the amount being borrowed by the buyer to finance the acquisition of intangible assets such as goodwill.”
The key word is “should”. The SBA seems to be leaving it somewhat ambiguous and open for interpretation. Still, it seems obvious that lenders will be leaning on sellers more and more to help out with the financing.