Seller Financing: A Win-Win for Business Acquisitions

July 26, 2023

Following the Small Business Administration's (SBA) recent changes to its guidlines related to partial business acquisitions, those interested in acquiring a business or a partial ownership interest in a business will likely have some questions about seller financing, which should become more common now that these types of acquisitions can be made with the help of an SBA 7(a) loan and cash injection (down payment) requirements have been loosened.

What is seller financing?
Seller financing allows the seller to provide a loan to the buyer, which the buyer then pays back in installments, with interest. The seller note is paid back from the cash flow of the business acquired by the buyer and is often used to bridge the gap between how much financing a buyer can get from the bank and the total purchase price.

Why might a bank require seller financing?
Risk Mitigation. Banks often view business acquisitions to be riskier than other loan transactions due to the change of ownership, primarily when the buyer lacks industry experience, ownership experience and/or capital for the down payment or post-closing cash. By incorporating seller financing into the terms, the bank ensures that the seller retains a vested interest in the business's success and is more likely to support the buyer during the transition period.

Advantages for the Buyer:

1. Access to Financing: Buyers who may struggle to secure a loan or have limited capital can benefit from seller financing, which provides an additional funding source and can help them to buy a business that otherwise might be unattainable.
2. Flexibility in Structuring the Deal: Seller financing allows for more flexible negotiation terms between the buyer and seller, including interest rates, repayment schedules, and other conditions.
3. Reassurance: With the seller still invested, a buyer can feel more assured about the business’s success going forward and confident that the due diligence information provided is accurate.

 
Advantages for the Seller:

1. Increased Marketability: By offering seller financing, the seller expands their pool of potential buyers.
2. Steady Income Stream: Seller financing provides the seller with a steady income stream through the interest payments on the loan, maximizing the return on their investment.
3. Deferred Taxes: Seller financing can be used to defer the capital gain taxes owed on the sale, meaning sellers don't have to pay taxes on the money they make from the sale until a later date.

 
BayFirst is home to a nationally-ranked SBA lending team that understands when seller financing can be a valuable option for both buyers and sellers in a business acquisition and the potential risks involved. If you’re considering buying an entire or portion of a business using seller financing, get started here or give one of our experts a call at 833.220.2792. We can help you structure a deal that aligns with your unique needs and circumstances, with or without seller financing.