I'm getting ready to list my small manufacturing business and a couple of buyers have asked about seller financing. I'm open to it but nervous about carrying a note for years and then having the buyer default or run the business into the ground. What are the real protections people use? I don't want to be the guy who ends up taking the business back with nothing but debt and broken equipment.
Seller Financing
Negotiating seller financing without getting burned
The big one is a lien on the assets you're selling, plus a personal guarantee from the buyer if they have any personal assets. Without the guarantee you're just hoping they behave. Also make sure the note is clear about what happens on default, especially who pays legal costs.
How big is the note relative to the sale prcie? That changes everything.
TidepoolGazer is right about the guarantee. I'd add that you want the buyer to put real money down, like 20-30%. If they have no skin in the game they'll walk away the moment things get tough. I've seen sellers finance 90% and then get the business back with a trashed customer list and no cash. No thanks.
Down payment would be around 25% if we go that route. The buyer is an individual with some sxavings but not a lot of other assets. That's part of why I'm hesitant.
if they have no other assets, a personal guarantee isn't worth much. You need to think about collateral. Do you keep a security interest in the equipment? And do you have a way to monitor the business while the note is outstanding? Some sellers require monthly financials until it's paid off.
This is why I walked away from a deal last year. Buyer wanted me to hold 70% and had no collateral. I said no and he got offended. Better offended than broke.
A few other thin gs from my own sale: make sure the note has a clear acceleration clause, and a provision that lets you inspect the books. Also think about whether you're willing to take the business back. Sometimes the best protection is just being ready to foreclose fast.
One thing that saved me in a previous deal was requiring the buyer to keep a life insurance policy assigned to the note. If they die, you get paid. It's not perfect but it's something. And yes, get a lawyer who has done seller financing before, not your cousin who does real estate closings. The documents matter.
Thanks, this is helpful. I'm going to ask my attorney about the personal guarantee and the insurance assignment. Still not sure I want to carry a note at all, but at least I know what to push for if I do.
Also don't forget about the tax side. Installment sale treatment can be good or bad depending on your situation. Worth a quick call with your CPA before you agree to terms.