I'm selling my hardware store after 22 years. Buyer is serious but can't get full bank financing. He's proposing 60 monthly payments on a 5-year note with a balloon. I've never done seller financing before. How do I negotiate terms that protect me without scaring him off? Specifically interest rate, down payment, and what happens if he misses a payment.
Seller Financing
How to negotiate monthly payment terms with a buyer
Down payment is your biggest lever. Don't go below 20-25%. If he misses a payment, you want the right to declare default and take back the business. Make sure the note says that clearly.
What RustyAnvil said about default is key. But also think about the interest rate. You're acting as the bank, so charge a rate that reflects the risk. If he's a weak borrower, 8-10% isn't unreasonable. A balloon after 5 years is common but make sure he knows he'll need to refinance or pay up.
I sold a landscaping business two years ago with a 7-year note. My advice: get a personal guaranty from the buyer and have him put up collateral beyond the business assets. Also, require monthly financial statements so you can spot trouble early.
Thanks, all. GrayPebble, did you use a lawyer to draft the note? I'm wondering if I need one or if a standard template is enough.
Absolutely use a lawyer. A template won't cover your specific situation. Especially for default provisions and how you can enforce them. Worth the few hundred dollars.
Also consider a right of setoff. If he defaults, you can offset any payments you owe him (like for consulting) against what he owes you. That's saved me before.
One more thing: don't let the buyer talk you into a long interest-only period. It feels good short term but delays principal repayment.
CopperKettle77, yes, I hired a lawyer. It cost about $1,500 but was worth it. We also included a clause that if he misses two payments, the entire balance is due. He never missed one, but the clause gave me peace of mind.
Also, make sure the note is secured by the business assets. If he defaults, you can foreclose and sell the assets to recover your money. That's moore important than the interest rate.