Options for Financing the Sale of a Business
Please feel free to contact Sunbelt with your questions regarding the choices for financing the sale of a business, or use our buying a business or selling a business forms.
The down payment is normally equal to the Seller's Discretionary Earnings (SDE).
Tell Sellers about the choices (remember, someone has to finance the balance):
Choice #1 (the most common) - Bank with SBA Guarantee with or without a small Seller note
- Sometimes requires the seller to take a subordinated small note – no problem except for SBA 155.
- Sometimes requires additional collateral – Buyer’s house and any other Buyer assets
- If a Buyer gets into trouble and misses payments, the bank shuts down the business & forecloses
- They layoff lifelong employees, many are like relatives to the Seller
- They don’t pay off lifelong creditors, a few are the Seller’s personal friends
- The customers have no place to acquire goods & services, a few are the Seller’s personal friends
- The business is closed and the Seller’s legacy is gone, gone forever.
- Next, the bank has an auction. Auction proceeds don’t cover the bank note (not many hard assets).
- Therefore, the Seller’s note is worth nothing and the business is gone.
Choice #2 – Seller financing
- Seller only pays tax on the down payment and not on the note amount.
- Seller gets a good return on his money and a nice monthly income.
- Seller is protected because they get monthly P&L, Balance Sheet, Right to Offset, etc.
- Buyer gets into trouble, however seller already knows because of the monthly reports.
- Together they work out the problem, maybe seller doesn’t get a payment or two but business continues.
- Business continues, buyer’s down payment is safe and sellers note is safe.
- Employees jobs are safe, creditors are safe and clients continue to get goods and services.
Choice #3 – Seller financing with Commercial Performance Bond
- Same as choice #2 except Buyer or Buyer & Seller pay for a Commercial Performance Bond that guarantees the note payments.
- Very Expensive – a fee of 8 to 15%.
For additional information, contact Sunbelt of the Greater Bay Area.