California Business Broker: Seller's Financing and Risk

On other pages of California Business Broker .com we addressed risk as it pertains to buyers. We noted that an increase in risk to the buyer will often lead to a reduced selling price. The common belief is that buyers are the only party assuming risk. This is not true. Seller's also assume some risk when their business is sold. Risk presents itself when the deal is structured. On this page of California Business Broker .com we will try to explain the relationship between risk and selling price for the seller.

Business owners assume risk when they carry a note for the buyer. The note is secured by the assets of the business that they have just sold. The issue is that a buyer may not run the business as well as the seller, thus depleting or destroying the assets that secure the debt. Coincidentally, this happens in a sale of a business between family members as well. Additionally, the seller's note may be subordinate to the lenders' note if there is one. This means if the business fails then a lender is ahead of you in line. Many times the only recourse is for the owner to retake the helm of the business and try to salvage what they can. Not many seller's ideal vision of retirement.

The first and best way for a seller to reduce his or her risk is to select a candidate that is capable and well capitalized to buy the business. In some cases, a seller gets an attractive offer and grabs it up - just to find out later that the buyer cannot come through or does not have the ability to effectively run the business. Lenders usually need to see some background or experience in the field and a seller should look for this as well.

With this being said, seller financing is still a very viable way to structure the sale of a business. Many times this is the only way to make the deal happen or to bridge the gap between selling price and what a lender will finance.

A truth in business sales : Sellers prefer to get all cash. Buyers prefer to leverage as much of the deal as possible.

How can a seller mitigate some of the risk when carrying a note? In other words, how can a seller make sure they get paid?

This graph shows the relationship between relative risk and down payment. As you can see with a 100% down payment or all cash the seller has no risk. (far right bottom)

With 100% financing the seller takes on all the risk. If the business fails - the seller could be left with very little or nothing.

So you may ask, why would a seller want to take on this risk?

A seller will take on some risk to make the deal happen and because there is a relationship between seller risk and selling price. I have a page on California business broker .com - regarding business pricing and risk. The higher the risk for the buyer the lower the selling price. There is an inverse relationship here for the seller. As you can see if the seller were to get all cash - lower risk, ( far right ) this generally lowers the selling price by 20%. Essentially, a seller can get a higher price by taking on some risk or a lower price by reducing risk.


As with many aspects of buying or selling a business, deals get done by meeting in the middle. This is true with deal structuring.

SBA Loan

If the business for sale qualifies, the SBA lender will fund about 75% of the deal, leaving a 25% down payment. If a seller can supplement the deal with a 10% or 15% sellers note, this will go a long way to make the deal happen.

Conventional Loan: In some cases the best deal is a non SBA Loan.

UPDATE: JUNE 2009: The credit crunch has made obtaining bank financing for business acquisitions extremely difficult. Sellers should be prepared to carry a much larger note than in the past.

All Seller Financing

There are some deals where the seller finances 100% of the deal. This is rare. We work with lenders that will work hard to make the deal happen. With this being said, amount down will be much greater than it would otherwise. In these instances, a 30% - 50% down is recommended.

The best way to reduce seller's risk is to demand some sort of significant down payment and adjust it according to the level of risk. A 15%-30% down is generally the most desired and the most common amount down.


It is advisable to have the buyer offer some asset outside of the business as collateral for the note. Buyer's want to offer as little security as possible and sellers want as much as possible. Real estate is usually a possibility. It is important for the security to be guaranteed by the buyer and the buyer's spouse personally and by the buyer's business.


A guaranteed way for a seller to NOT get paid is by not being truthful about the state of the business and / or the business's income. It is very important to be truthful about taxes, liens, vendor relationships, customer relationship, pending litigation and employee relations. In the sales contract the seller will have to state that there are no areas of concern and if this is not true gives a buyer all the reason in the world to stop paying.

It is also important for the seller to only make representations for things within his or her control. Sellers should avoid making predictions or forecasts.

Additional Items to Consider:

For sellers there are others areas of risk the come into play and need to be considered when selling a business.

Product Liability / Future Litigation: Stock Sales are not only used for tax reasons. If your business is in a highly litigious industry, a seller may desire a stock sale in order to shield themselves from future litigation. This is an area where a attorney who specializes in business transactions is recommended.

Fraudulent Conveyance or Fraudulent Transfer: This is very rare - but if a business sells for an exceptionally high price and the business then falters vendors or creditors may come after the previous owner to get paid. An easy way to protect yourself from this is by selling your business, at a fair price to a well capitalized, experienced buyer.


For readers who are buyers: Your ability to raise funds for a down payment will be a big factor in determining what size business you can buy. You ability to run the business effectively will also be a big factor.

For readers who are sellers: Your ability or willingness to carry a note will make a big difference determining the selling price and , in fact, may determine if your business sells at all.

If you are a Southern California business owner and you are seriously considering the option of selling your business, work with a professional business broker who can help you navigate this complex transaction. Contact us today at 866-500-7090.

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