When business owners are looking to sell their business, sellers can consider financing a portion of the sale price for the purchaser, especially in situations where it can be difficult to secure financing from banks. This form of seller financing can be executed through a promissory note issued by the seller to the purchaser as part of the transaction documentation.

Seller financing can have several benefits for both the buyer and seller. The buyer may avoid obstacles associated with third party lenders (additional cost, disclosure requirement, etc.) and have more flexibility over the purchase price. By negotiating directly with the seller, the buyer is able to deviate from the typical terms that come with such third party lenders.

On the seller side, seller financing allows the seller to dictate the pace of the deal and may allow the seller to negotiate a higher purchase price. The seller can move as quickly as it wants when negotiating the seller note, instead of waiting for the buyer and third party lender. Also, because the seller is taking on more risk by loaning a portion of the purchase price to the buyer, the seller gains leverage to negotiate for an attractive interest rate or other favorable components to the transaction. 

While it involves more risk, seller financing can be very beneficial for all parties involved.

Of course, a seller note also comes with more risk to the seller. With the seller taking on the risk of the buyer paying the note, it’s important for the seller to take measures to protect itself. For example, the seller note should directly address late payments and non-payments and the resulting penalties. The seller can also require the buyer to reach certain financial benchmarks post-acquisition. Additionally, before entering into the note, the seller should require the buyer to provide as much information as possible – credit score, financial statements, and any other relevant information. Lastly, the seller should only finance a portion of the total purchase price (e.g. 10-40%) to alleviate the risk.

While it involves more risk, seller financing can be very beneficial for all parties involved. We recommend speaking to an experienced attorney before committing to this type of transaction to see if it makes sense for your business.

Tom Budnik is a startup and venture capital attorney based in Chicago, IL. He represents founders, startups and venture capital funds in a wide variety of corporate transactions, including raising capital, navigating issues associated with rapidly-growing startups, and advising buyers and sellers in acquisition transactions. He can be reached at tbudnik@founderslaw.com.