When interviewing Cleveland Ohio business owners in preparation to market their business for sale, one
major topic to discuss upfront is deal structure, more specifically, are they willing to finance any part of
the sale? Most business owners respond they want an all-cash deal at closing. They want to cut the cord
and be done. No more responsibility, no more problems, a clean break with no strings attached. This is
completely normal and understandable, however is it realistic and are Business Owners leaving big
money on the table by demanding an all-cash deal? The one strategy that will increase the sales price
and put more funds in the seller’s pocket is to offer seller financing.
Business owners have a fear of financing because they are concerned the loan may not be repaid, may
be disrupted, and may cause legal or collection problems down the line. These are all valid concerns, but
especially in small business sales, seller financing is often necessary.
Seller financing, if executed properly, results in a win-win scenario for both the buyer and seller. Below
we list the benefits of seller financing and then how safeguards can be put in place to enforce the
performance of the note.
Seller Financing Benefits
1). Offering seller financing in the marketing of the business sale will expand the buyer pool. Seller
financing reflects the seller’s confidence in the business’ future performance, and this will drive buyer
competition resulting in increasing the price.
2). In many business sales, up to 90% of the assets may be intangible goodwill. Lenders like to finance
hard assets, and many have caps on the amount of goodwill they will fund. Seller financing fills in this
gap between what a lender will finance and the seller’s asking price.
3). The seller receives more income because of the interest paid over the life of the loan. Many times,
the interest rate is at or above lender market rates and significantly higher than CD’s or other
conservative investment accounts.
4). Allows the seller to defer tax liabilities on the sale which supplies time for more tax planning. It is
important to consult with an accountant about tax consequences and tax savings on an installment note
rather than an all-cash sale.
5). Buyer’s expect price discounts on all cash deals, so offering financing helps in negotiating the highest
price.
Selling Financing Safeguards
1). First determine that the buyer is creditworthy and qualified to run the business successfully. Request
to see a copy of the buyer’s credit report.
2). Require the buyer to individually guarantee the loan and sign a Cognovit Note. A Cognovit Note is a
special type of note used in business transactions. Consult with an attorney for specific benefits
3). File a UCC lien on the business assets. This is a security instrument that enforces payment of the
note.
4). Shorten the term of the Seller Note to 3 -5 years. This reduces the risk period and returns the
principal of the note quicker to the seller.
5). Monitor the financial health of the business by requiring the buyer to supply regular financial
statements on the business to the seller.
6). Set up automatic payments on a specific date out of the buyer’s business account directly to the
seller.
When preparing to sell your business make sure to discuss seller financing with your business broker.
Offering seller financing in the market listing opens the buyer pool and many times results in selling the
business at the highest price putting more money in your pocket. Different safeguards can be put in
place to ensure performance of the note to elevate any legal and collection issues.
For more information on selling a business please contact me below
Mike Snider
President; Founder
Transworld Business Advisors – Cleveland West
Office: (440)-628-4440
