Does anyone have experience with seller financing in past deals?

March 11, 2021

by a professional from University of Pennsylvania - The Wharton School in Philadelphia, PA, USA

Hey searchers!

I'm doing research into the seller debt process. I'm interested in chatting with searchers or business owners who have used seller financing on deals in the past. I'm curious about the common terms, the process for servicing the seller debt and what, if any, additional underwriting was done on the buyer.

The context is that I'm interested in streamlining the issuing/servicing with a software product, if it's currently a pain for either sellers or buyers.

Thanks!
Will

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Reply by a professional
from University of Minnesota in Minneapolis, MN, USA

While there may be some industry standards among more experienced Sellers/advisors, in the LMM/Main Street space where I live, I have found that in reality anything and everything is on the table. I was involved in a sale last year that was 100% Seller financed and the term was something crazy, like 10 years. Yes, this transaction was an anomaly and involved a lot of preexisting trust between Buyers and Seller, but it happened because Seller prioritized tax treatment over taking his money off the table.

I've also seen a lot of variation on securing Seller debt, from standard security documents (UCC filings) and personal guarantees to mortgages on Seller homes, akin to the SBA. Everything is, of course, subordinated to the senior debt (this is the one constant - subordination is a non-negotiable in my experience). Knowing and navigating the state and local filing requirements for perfecting an interest in the collateral could be a hurdle, but otherwise I could see a lot of value in standardizing the issuing/servicing process for some Seller debt.

Reply by an intermediary
from Naval Postgraduate School in Bellevue, WA, USA

I work with Sellers in the $3M - $15M revenue space. The majority of these sellers accept a 10% - 15% promissory note. Our guidance is that the seller promissory note should not exceed the buyers cash contribution i.e. the buyer should have more skin in the game than the seller. Many SBA 7a deals dictate a seller note and sometimes require a two year holdback on payments.

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