What is Seller Financing?
Seller Financing, or a “seller note”, is a method for buyers to fund the acquisition of a business by negotiating with the seller to arrange a form of financing.
Seller Financing in Homes and M&A Transactions
With seller financing, also known as “owner financing”, the seller of a business agrees to finance a portion of the sale price, i.e. the seller accepts a portion of the total purchase price as a series of deferred payments.
A significant portion of transactions involving the sale of homes and small to medium-sized businesses (SMBs) include seller financing.
Seller financing means the seller agrees to receive a promissory note from the buyer for an unpaid portion of the purchase price.
While less common in the middle market, seller financing does appear occasionally, but in far lower amounts (i.e. 5% to 10% of the total deal size).
Usually, the seller offers the financing if no other sources of funding can be obtained by the buyer and the transaction is on the verge of falling apart for that reason.
Seller Note in M&A Deal Structure (“Owner Financing”)
A seller note is designed to bridge the gap between the seller’s sale price and the amount that the buyer can pay.
However, there is substantial risk associated with providing financing to a buyer, especially since the seller is an individual with limited resources rather than an institutional lender.
The seller must carefully vet the buyer by requesting a credit report, calling personal references, or hiring a third party to run an in-depth background check.
If all goes well and the buyer fulfills all their debt obligations, the seller note can facilitate a quicker sale, despite the risk undertaken.
The process of applying for a bank loan can be time-consuming, only for the result to sometimes be a rejection letter, as lenders can be hesitant to provide financing to fund the purchase of a small, unestablished business.