“Seller Financing – Is it for me?”

Buyers will sometimes ask -”Will the Seller consider financing part or all of the purchase price?” The Crown Business Group, LLC advises seller’s to consider several factors before considering an answer. What the buyer is really asking is, “does the seller want to become the bank?”. That is the proper context for the question to be considered no matter how attractive seller financing appears..

When I was with Price Waterhouse, I consulted with many banking clients, both large and small. Regarding loans, the bank’s perspective was not how much money they would make in fees and interest, but whether the borrower would pay the principle back in its entirety. That should govern the seller’s perspective as well.

  • Is the buyer able to pay back the principle?
  • Where will the money to pay back seller financing come from?
  • Will it come from the operation of the business?
  • What are the risk of holding the note? For example, if the buyer defaults, what are the sellers remedies.

If the seller simply finances an office building that housed the business offices of the business, then maybe a default is not a terrible ordeal since an office building may lend itself to other tenants. However, consider financing a fast food restaurant, land and building. Fast food buildings are very specific in use and sometimes very specific to franchise specifications. Therefore, financing a fast food location is higher risk because the location may lend itself only to the operation of a fast food concept. Additionally, the operations originate from the location itself which means that the seller may have to also step back into running the business.

Other issues that may give a seller pause:

  • Does the property house or use any chemicals or hazardous materials in the business?
  • Could the property be subject to condemnation or a re-zoning?
  • Does the buyer depend solely on the operations of the business to pay back the sellers note?
  • Does the noter reflect an interest rate that rewards the seller for risk assumed?
  • What term of financing is the buyer requesting?

Bottom line, seller financing can be an attractive option to both seller and buyer, however, the seller is taking on risk and risk should be carefully weighed and rewarded?

William A. Robinson III, CPA

Member – The Crown Business Group LLC