I've heard and read that owner financing on a small business is considered a strong endorsement, seeing that the seller is in part tying part of their exit to the continued success of the business.
I've also wondered though, if it is a way for some owners (specifically ones that have suffered life changing events such as illness, divorce, etc.) to exit a business with limited oversight (as you're not dealing with lenders, etc)? Does anyone else take a second pause when the seller immediately mentions they will entertain a seller's note, or should I just learn to accept 'yes' as an answer?
Is owner financing strongest endorsement, or fastest way to exit bad deals?
by a searcher from University of Maryland University College
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1) Difficulty in financing - as you mention, there may be some risk factor to the business, or potentially poor bookkeeping practices, that the seller is putting skin in the game to facilitate an exit.
2) Timeline to close - many sellers can get frustrated with what feels like a second or third due diligence with a lender. There is the pre-work required to prepare a business to sell, the buyer's due diligence - and then another layer with a financial institution. For a small to medium business, this can be daunting. Seller financing eliminates what can be an extra 30+ days of churn with a lender.
3) Financial reasons - when prevailing interest rates were so low, the risk for a seller to entertain seller financing didn't provide a lot of incentive. With SBA rates over 10%, seller financing - especially for a seller looking to maximize their bottom line - can put some healthy additional consideration in their pocket. There are also tax benefits as well, as the exit is spread out over multiple tax years, installment sale, etc.
4) Timeline for repayment. Many lenders want the seller to have some level of skin in the game anyway; 10-20% seller note, and especially in the case of SBA, that note is on standby for at least some period of time. Finance 20% and wait 5 years, or finance 70% and get all of the principal and interest payments now.
5) That's how they bought the business. I have a seller right now, that acquired the business 12 years ago and relied on the partnership and financing from the seller. He wants to provide that same opportunity to the next generation. For reasons that may or may not be valid, he doesn't have a positive opinion of the banking industry and would prefer to avoid them.
For sellers, I generally advocate for no more than 20% in seller financing, so I'm not championing this by any means, just providing some insight into other drivers for a seller to finance.
My advice - control what you can control. For any business, you are entertaining an acquisition - thorough due diligence should be completed; don't rely on financing partners to underwrite and protect you. If you need help with a business valuation or a QofE/QofE lite that won't cost a mint, I have some partners I've been using to get my sellers ready, that are cost-effective.
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