M&A Seller Financing | What You Need to Know

Hi everyone! Hope you’re having a great week. If you’re planning on selling a business you probably hate the idea of seller financing or holding a note for the buyer. Let me tell you today why you should warm up to that idea.

But first a little bit about me, my name is Brett Cenkus. I’m a business attorney. I do my legal work out of Cenkus Law, which is my law firm based in Austin. I have an office in Houston, as well, and I’ve got clients all over. I also do some consulting, some business and startup consulting out of The Startup Shepherd.

Now, seller financing and why you should warm up to it as a seller. Three main reasons. One – higher purchase prices. I read a recent business broker survey that said the average sale price for a business where the seller helped carry back financing is 15% higher.

So, larger purchase prices. That holds true as well in other markets. I know Realtors who sell who sell commercial property, who sell land, and tell me all the time that you’re going to get more money when you structure a more creative, favorable deal for a buyer.

The second reason to consider seller financing for your business – you increase your pool of buyers. That might be one of the reasons that you get a higher purchase price – because you’ve got more competition, you’re increasing the number of people that can get a deal done through you.

Last reason – there’s interest on the note and that might have favorable tax consequences for you to get that paid over time rather than right upfront – talk to a CPA, yadda, yadda, yadda – but the point is that’s another reason to consider seller financing. Don’t categorically write it off, it could make a ton of sense and can help you get a deal done. It might be something you need to do depending on how in-demand your business is and what your market is like.

Now, if you do it, though, some really important things: you want to be as secure as possible in that note. If the buyer has other financing, and they often will, it may not be possible to secure the note – meaning to tie the payment of the loan to assets and to put a lien on those assets (the lien of the business you just sold). That’s ideally what you want to do. If the buyer is getting financing – SBA loan or something – they’re going to have a first lien on the assets. But, you need to figure out whether or not that’s available and lien anything you can. It’s way, way better to have leverage of security in the form of assets, to have your loan be tied to it. So you want a secured loan not a blank, not just a regular promissory note if you can. And, if you secure it, you’ve got to file your lien, which is usually done with at the Secretary of State in most states depending on what the assets are.

But, the point being, look for security first if you can, and then you want a relatively quick payback, and a high interest rate. That makes sense and that’s all negotiable.

Again, sellers, I know because I see it all the time, want no part of seller financing, but you’ve got to realize it’s not just a give, there’s a take there. There’s a, there’s some real strong benefits to considering it.

I saw a deal get done once: a 100% seller financing. It was a pretty unique situation and a heck of a deal for the buyer (who knew the seller really well). But, the point being, it’s not always a terrible thing and some buyers need that for one reason or another. That doesn’t make them a bad buyer. I’m curious if you’ve sold a business, if you’re thinking about selling a business, are you open to seller financing? Drop a comment in. If you have any needs around seller financing or M&A generally, structuring deals, anything about startups or business law, let’s get in touch.