One of the first questions that a buyer and seller of a business has to answer is how the purchase will be funded. While being able to purchase a new business with cash at closing is of often ideal, it is often not possible. Having the seller of the business finance all or part of the purchase price of the sale may be an attractive method of funding the purchase, especially when traditional or SBA funding is not available. Though we tend to see seller financing on small transactions (under $3,000,000.00) and involving individuals or closely held as the buyer and seller, we are starting to see the number of larger transactions and more complex utilizing owner financing increasing. One of the larger upsides for the buyer is that seller financing may allow buyer to purchase a business that they would otherwise not be able to purchase through SBA or traditional financing. The payment amounts can be arranged to have feasible repayment terms that the buyer can reasonably afford. The buyer can also benefit from seller financing if the note or other repayment procedure permits buyer to offset certain seller liabilities or indemnification from the repayment amount. In this instance, what is good for the buyer may be bad for the seller, in that the buyer could attempt to improperly withhold payments due to seller for claims that are not otherwise justified. Careful drafting of the promissory note or repayment terms is critical to protect the seller from improper offsetting of payments due seller by buyer. An additional potential drawback to the seller, is that the purchase price is paid out over time with the buyer’s ability to payback often contingent in part on the success of the business. If seller financing is to be utilized, it is critical that both the buyer and seller are protected by using sufficient loan and security interest documents. As long as the proper loan and security interest documents are used, seller financing can provide a feasible and attractive alternative if other methods of financing are not available or desired.
Eric R. Thiergood, Sr.
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