What is Seller Financing?
One important aspect of a business transaction is seller financing. However, it is often overlooked or forgotten when it comes to negotiating and agreeing on a purchase price. Seller financing is common in both business and real estate transactions.
What is Seller Financing?
Seller financing is a loan provided by the seller of a business to the buyer of the business. It is generally for a portion or the entirety of the purchase price.
Seller financing is another way an individual can obtain financing for a business transaction. It becomes a debt obligation for the borrower, and a fixed income instrument for the seller. The borrower will assume what is commonly referred to as a “seller note.” This seller note comes with terms and conditions, like any other debt obligation.
Common Terms and Conditions
Common seller note terms that Peak Business Valuation, business appraiser Texas, sees on a regular basis are:
- Fully amortizing 5-year note. (The most common seller note term lengths are 3-10 years)
- 7% interest (The most common interest rates range from 6-10%)
- Monthly payments of principal and interest. (There are other seller note structures, but this is the most common.) The second most common deal structure is a type of balloon payment. These deals are structured so that the seller accepts interest payments during the term of the note. Then, the borrower pays a large balloon payment of the principal amount at the end of the note.
- The seller note is generally subordinate to other types of financing, whether that be an SBA 7(a) loan or a conventional loan.
- The seller note is also generally on some form of “stand-by” meaning that the seller will not accept any payments until the other form of financing has been paid off.
Although these terms will vary from one business transaction to another, these are some of the most common.
Seller Financing and Small Business Administration (SBA) Loans
There are some important notes regarding seller financing and SBA7(a) loans that are worth mentioning.
When it comes to seller financing, the seller note usually must be subordinate to the SBA loan. This means that if the business cannot make its payments, the SBA and other lenders would have the first claim on any business assets before the seller would.
Full or Partial Standby:
Additionally, the seller note is usually on full or partial standby until the borrower pays the SBA loan back in full. Full standby means that payments on the seller note are not made until the borrower pays the SBA loan back in full. Partial standby means that payments on the seller note are not made until after a specified period of time.
Peak Business Valuation, business appraiser Texas, sees a variety of seller notes on a regular basis. Some seller notes are on full standby, and some are on partial standby. The average partial standby we see is two to five years.
These are some of the most common terms for seller financing that Peak Business Valuation, business appraiser Texas, see on a regular basis. However, there is no “one size fits all”. Schedule a free consultation call with Peak Business Valuation to talk more about structuring a business transaction!
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