We’ve been working with a broker and they’ve had a good amount of interest from buyers. Originally we said we were not interested in seller financing, and we just wanted a lump sum at closing.
We got our first offer, and what do ya know, they want to do 22% down at closing, and seller finance the rest at 8%. So on a big (for us) chunk of money, the 8% would be nice additional…but it’s spread out over 4 years. they did offer 10% more than asking with this proposal
Has anyone done a deal like this?
My biggest worry is if they stop making payments.
The sale would be under $300k to give an idea. The payments aren’t absurd. Buyer has a very high credit score and is keeping their full time job.
Any thoughts? Insights? Blind spots?
Got an offer to sell our company!! 🎉 But they want to do seller financing… 🤷
byu/Stunning_Syrup_ inEntrepreneur
Posted by Stunning_Syrup_
26 Comments
If they have good credit its not a big deal. Just figure out your plan if things don’t go well
Are you confident in the buyer’s ability to run the business profitably?
Your lawyer can ensure that you can basically take the business back if they stop making payments, but that won’t help much if they run it into the ground.
In the end you have to decide if you trust their abilities to keep the money flowing.
Congrats! Contract with clawback of company if any payments are missed.
Be careful, I would make sure it’s at least 50% down and the note secured against what you sell them if they won’t PG it. If they will PG it and have money then you should be ok, a lot of the time these ppl won’t PG it so your next best thing is securing it against the asset you sell. Trust me I’m going through this right now, def don’t do anything less than 50% down, you’ll regret it in a year when they default on the next payment (you’ll regret anyway but at least you got a big chunk upfront and knew what you were signing up for).
Have them put up at least 50% in assets as collateral on top of the financed amount. If payments aren’t made, all biz assets return to you and any payments are forfeited. The collateral assets are in return for lost business opportunity
This isn’t a bad deal just need to attach a bit of security to it
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One option is that they also have to keep you on even at some sort of part time salary so you can make sure they dont mess it up
Make sure you have security for the loan, not just a lien over the business, get personal guarantees etc
Are you in the USA? If so, do not do this. Make them get an SBA loan. They’re easy to get (especially under $300k) and let them deal with the repercussions of not paying. I promise you, you do not want to be the banker here
My initial inclination is that it sounds hairy. Be very careful.
Make sure you are protected from 1) them running the business into the ground. Some metrics on sales and profits that void the deal and 2) a fast forclosure plan if they miss payments. You shouldn’t have to sue or have a long forclosure process. If they miss 2-3 payments they forfeit the business.
My Unclle sold his business under a seller finance deal and got it back three different times.
What is the risk of the buyer putting 20% down, taking all your internal records like your product details, marketing leads and customer list then just defaulting on loan, I would background check the people involved an make sure they don’t have any other interests in a similar market
Ask yourself:
“Why aren’t they financing the purchase of the company through established lending channels?”
The answer will be your answer.
Don’t do it at this stage, unless your company is for sale for years already, or you are confident this is your best offer. Closure is important, you need it to focus on your next endeavor.
Usually Reddit is not a good place to ask these questions. You get group think and a million different answers
I would find a trusted mentor who has been through this and other multiple exits and pay him for a 2 hour call to discuss strategies and guide you through the whole process
Would like to see what a business broker has to say. I think that’s a pretty normal offer to receive
I think 4 years is too long but I get that you’re eager. I’d do 36 mos with 33% down and personal property guarantee, but give them a big incentive to finish payments sooner. I’d also be very careful to reinvest conservatively a fare portion of the proceeds to buffer if you get stuck in some legal shenanigans. Even still there’s a thousand ways this could go south for you. And I hope they all miss you.
I wouldn’t touch this offer. There’s way too much risk for you.
If you have faith in them making payments then yes, I’d do it. I have done these in the past (as buyer and seller.) Make sure they personally guarantee the promissory note. If something goes sideways you can go after them personally.
What is the collateral? If they want to use the business as collateral, there’s a ton of risk because their ability to run your business is unproven. If your business has the processes to run with minimal management, then you shouldn’t be pressed to sell – if it doesn’t, then the risk of them fucking things up is exceptionally high.
Talk to an attorney who does business law and transactions. Ask what options there are to make you feel confident in the sale and see if you’re comfortable with that. You can ask for a personal guarantee.
When they run your company into the ground in 9 months who’s making the payments then?
What type of business?
I run a business, but have no experience in buying out other businesses. However, have seen first hand how some of the deals can go wrong. A friend of mine owned a local service business with about 30 employees and was doing well. He had an out of state firm make an offer and although I don’t know all the ins and outs, it was something like a million up front and 3 million over 5 years. He went ahead with it, got the first payment of a million, and it all fell apart right after that. They have been in court for the last few years over it, and last I heard was he didn’t ever expect to see any more money from it even if he won the suit. The seller was a fairly sharp guy, had good attorneys, but still got shafted.
This is all purely anecdotal, and I’m sure there is a lot to it that I’m not privy to, but in his situation, it all went horribly wrong.
Seller financing is standard, but not 78%!
You have other options. As some other people mentioned, they could get a loan and pay on that. Or, since they want an earn-out, if you require them to adjust for income taxes (do 3-4 iterations), you could take an employment contract, which is enforceable. But the best case scenario is to be out of the deal altogether. If they want it bad enough they’ll find a way. If they don’t, it’s best to be disillusioned sooner. (Source: have done some brokering myself.)