Seller Financing – What’s the Norm?

We are often consulted by buyers and sellers of businesses as to how much the seller of a business should finance for the buyer. There are many variables that dictate our response. If our client is a seller, our preference would be none or as little as necessary; if our client is a buyer as much as possible. But what is realistic?

There is no set norm! Is the buyer stretching their down payment to buy the business and needs the seller to finance a larger amount? Is the seller asking for a premium price for the business? Is the business light on assets and the banks are not willing to loan more without sufficient collateral from someone? Is there a risk concern where a buyer wants the seller to have some skin in the game to ensure the seller tells the buyer everything about the business or the seller remains working in the business for a certain period of time? Is there is a heavy concentration of a large customer as a percentage of the total revenues?

Whatever the reason, in today's market with the banks being very competitive in the marketplace, a lot of cash sitting on the sideline of private equity groups, and high net worth individuals looking to co-invest in private companies, there isn't as much of a need for a seller to finance a large portion of the selling price. During 2009 and 2010 there was a greater need for a seller to finance a larger percentage or the buyer had to put in more cash.

Often we do see a seller getting more for their business if they are financing a large portion. However on larger strategic transactions we haven't seen any seller financing. Seller financing could be in the form of a note payable, interest free dollar amounts paid in the future, contingency payments like a royalty or an earn-out paid on a percentage of sales or gross profit possibly based certain milestones in the future. Interest rates on notes can be low or high depending on risk, fixed or tied to prime rates. The term of a note could be one to seven years or amortized over a longer period but with an earlier balloon. When there is seller financing, we like to see it personally guaranteed by the buyer and subordinated behind the bank, but that's not always the case.

If a seller were to finance a token amount, around 5% to 10%, it can go a long way in comforting a buyer. As we mentioned above, there is no norm, but there is a lot to negotiate with seller financing depending on how badly one party wants to sell and one party wants to acquire.

Please call us if you would like advice in determining what's best for your situation.