Examples of Seller Financing
When it comes to selling a business or buying a business, seller financing is an intriguing and exciting option to explore. Below we will review a few examples of how seller financing could work. Seller financing is also synonymous with a seller note and will be used interchangeably throughout this article. For additional questions, schedule a free consultation with Peak Business Valuation.
Financing Options
Craig wants to buy John’s business. John’s business is a pizza restaurant. John’s asking price is $500,000 for the restaurant. Craig only has $100,000. So he isn’t able to purchase John’s business outright. He will need some sort of financing. Craig has several options including the following:
- He can borrow money from friends or family
- He can borrow money from a bank (either in the form of a conventional loan or an SBA 7(a) loan)
- Craig can request seller financing from John
- He can do a combination of some or all of the above. If not, he may have to forgo the business purchase if he can’t secure the funds
Craig will want to explore all of his options to see what is best for his circumstance.
Scenario 1 – All Seller Financing
Here is a scenario that Craig can pursue. Craig can request that John provide some type of seller financing. Here is an example of how this could look.
- Craig pays $100,000 cash to John
- John and Craig sign a seller note of $400,000. The terms of the seller note are
- John will accept monthly payments of principal and interest for 5 years.
- The interest rate will be 6%.
- Payments will begin immediately.
After signing the seller’s note, and all other legal work has been completed for the sale of the business, Craig will be the owner of the pizza restaurant. Craig will pay John the $100,000 in cash right away, and then will begin making monthly payments of principal and interest, as agreed upon in the terms of the seller note. After five years, the seller note will have been paid off.
With the help of seller financing, Craig can purchase the business he wants right away. John can sell his business and receive monthly payments of principal and interest for his loan to Craig.
Scenario 2 – Seller Financing with an SBA Loan
Let’s consider a slightly different scenario. Let’s say that Craig wants to use an SBA loan to help finance his purchase of John’s business. The minimum down payment for an SBA loan is 10%. This time, Craig only has $25,000. The purchase price for John’s pizza restaurant is still $500,000. Craig goes to the bank to apply for an SBA loan, but only has a 5% downpayment. ($25,000/$500,000) Craig will have to come up with an additional $25,000 to meet the SBA minimum guarantee, or he may lose the deal.
Options for Financing
What are his options? Similar to the last scenario, he has more or less the same options:
- He can borrow money from family or friends
- Craig can request seller financing from John
- He can do a combination of some or all of the above. If not, he may have to forgo the business purchase if he can’t secure the funds
Craig goes to John and asks if he will finance the $475,000 that he is lacking, but John won’t. The most he is willing to accept on a seller note is $75,000. Is Craig out of luck? He actually isn’t! The SBA considers seller financing as part of a down payment or capital injection.
Take a look at What is seller financing? for a refresher on what a full standby seller note is, and how seller financing works in conjunction with SBA7(a) loans.
SBA Loan with Seller Financing
Assuming a full standby seller note, Craig’s new scenario would look something like this
- John and Craig sign the seller note for $75,000. (15% of the purchase price) The terms of the seller note are
- John will accept monthly payments of principal and interest for 5 years.
- The interest rate will be 6%.
- It will be on full standby, meaning payments will not begin until the SBA loan is paid in full.
- The total down payment for the SBA loan would be $100,000. This down payment consists of Craig’s cash payment of $25,000 (5% of the purchase price) and the seller note for $75,000 (15% of the purchase price)
- Craig receives an SBA 7(a) loan (assuming all other paperwork, requirements, fees, etc. are paid and met) for $400,000. (80% of the purchase price)
Craig would pay John $425,000 in total. (his $25,000 and the $400,000 from the SBA loan) After which, Craig would then begin to make payments on the SBA loan. Once the SBA loan is paid off, he would begin making monthly payments of principal and interest for 5 years until the seller note with John is paid off.
SBA loans are explained in depth in SBA Business Valuations and Obtain an SBA loan. For more detailed information about seller financing, business valuations, or SBA loans, schedule a free consultation with Peak Business Valuation, business appraiser Utah.
Summary
Seller financing can be advantageous to both the seller and the buyer of the business. However, it does come with some added risk and responsibility for both parties. Read more about the advantages and disadvantages of seller financing!
As always, consult with a business valuation specialist like Peak Business Valuation, business appraiser Utah, to discuss your specific circumstances! Feel free to reach out by scheduling your free consultation below.
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