The short answer is absolutely YES! The basic reasons, good and bad, for seller financing have not changed, but the urgency and need for this has become much more important now during the Covid pandemic in order to get an ownership transition accomplished.

There are many reasons seller financing is far more advantageous than not during these pandemic times. Let's review some of those reasons both PRO and CON:

CON:

3rd party lenders (Banks) typically all want to use the SBA guaranteed programs which typically means:

  • Long lead times as the data is gathered
  • Much more in fees are paid by the borrower
  • Too many bureaucrats or "decision" makers in the process to gum up the works
  • SBA does not allow "earnouts" which are critical in today's market place
  • Inflexibility of terms
  • Unwillingness of lender to work with the buyer if things in the new business do not go according to plan; no flexibility in the terms
  • Good buyers are often lost or run off due to the incredibly long and involved SBA loan documentation process
  • Personal guarantees required by any borrower having 20% or more of the ownership in the borrower
  • Bankers and or SBA lenders are most likely way over worked and the ability to be more helpful in a more timely manner are not as good as before due to limited personnel

PRO:

Seller financed transactions have these major advantages:

  • Much faster closing times
  • No front end fees to the bank
  • Seller is the decision maker, not a banker or bureaucrat
  • Earnouts or flexibility built into the seller's note to take into account a possible future pandemic re-occurring in the future is critical going forward to make buyers more comfortable with the risk of buying the business
  • If things go sideways with the business a seller is much more flexible on adjusting the payment terms as they know the business and the inherent risk. The seller typically does not want the business back and will be more flexible than a bank.
    • Seller does not want to go through the time, effort and expense of a repossession if the buyer or the business fails and this might have been prevented with some lender flexibility.
  • Good, quality buyers are at a premium and many are run off by the extended and very invasive SBA lending process
  • Seller note can be structured for say 3-4 years, with a balloon payment after that, so that the buyer can learn the business and then obtain longer term financing and take the seller out of the deal.
  • Seller is in a 1st lien position on the note as opposed to being in a back-up or 2nd lien position if the 3rd party lender were to require some % of the deal to be financed by the seller.
  • Federal income taxes are normally not due until payments are received by the seller as in an installment sale.
  • Interest income and principal payments are typically received by the seller on a monthly basis and this often satisfies a seller's need to have a monthly income. The interest income received by the seller over the terms of the note can often pay all of the closing costs incurred by the seller (ie: Brokers commissions and legal fees).
  • Seller and buyer typically have a closer personal and business arrangement that can be built into a long-lasting relationship that is helpful, especially if things do not go "according to plan".
  • Control of the transaction is in the hands of the seller and the buyer and together they can move things much more quickly and possibly prevent the loss of a quality buyer.

THINGS TO CONSIDER OR TO DO:

With a most likely recession on the horizon here are some things to consider having or doing in any transaction of this type:

Make a good credit decision on the buyer with credit and background checks on the buyer. Credit score probably north of 725-750 and a strong buyer balance sheet with adequate liquid assets is necessary for many reasons.

As most transactions are a sale of intangible assets consider a personal guarantee on the note and possibly have the buyer pledge additional collateral

Receive an adequate down payment in the 25-35% range

Buyer will be more comfortable if there is a right of offset in the seller's note in case there might be some issues that arise in the future and the payments can be reduced or the principal reduced for unforeseen matters that might arise.

Seller should educate themselves on the benefits of a seller financed deal so that they are prepared to present this to a buyer as a top action item and one that can possibly make the deal and cut the time to close down by months.

Seller financing will give a buyer a much better feeling of comfort in buying a deal that the seller is willing to finance as relationships and transparency are becoming more important.

Control of the transaction is so important to its success and many if not most times deals fall apart at the lending stage.

Valuations will be an issue in the near term due to the current pandemic and many if not most lenders will be somewhat unsure about where to go with this. It becomes important to determine what the cash flow was last year and make concessions or considerations in the terms of the note in case the economy is shut down again going forward.

  • A good attorney can help with "legalese" to help with the terms and conditions in a seller's note to protect both sides.
  • It's possible that the note will have to take into consideration what has happened over the past 6 months or so of 2020 during the pandemic and that going forward the new cash flow might have to be in the form of a pro-forma based on the next 6 months. A pro-forma for as many months as the economy has been shut down or cut back might be a good yardstick on how to determine what the cash flow of the business really should be.
  • Multiples of cash flow typically used in business values really should not change much, but totally high or low numbers due to businesses greatly affected by the changed economy should not be overstated as to their importance.


Seller financing has always been important in getting a transaction done. Now during these unusual times, seller financing is even more warranted to selling a business. For more information on how to sell your business, contact Business Brokers of Texas.