Have you ever done a Seller financed deal?

[Yoheadden]

We have a family owned retail store that has been in business since 1978. DW and I have decided it is time to close this chapter of our lives and begin our next in ER at the ages of 55. We were going to close it down, with a retiring/Going out of business sale with the last day being 7/31/25.
We’ve mentioned our plans to a few of our trusted Sale Reps, who we have known and purchased from for many years. Three of them have asked us if we ever thought of selling and mentioned another retailer who might be interested. She has a different type of store, although in the same industry and sells some of the same things we do. We eventually connected with this person and she stopped by after we closed one day so we can chat uninterrupted. We give her the tour and end up talking for 4 hours. LOL
Needless to say, we hit it off and share a lot of the same viewpoints and ideas about the business, as we do. She is interested in buying our store, we moved our “finish” date up a month to 6/30/2025 and agreed upon a tentative deal. I would prefer to not take a lump sum payment. It would be a big tax hit and I manage our income to benefit from health care exchange credits. If we were to take payments over a 4 year period, this would spread the income out and cover us until we are eligible to take from our IRAs. This sounds like the perfect situation, but if we do a seller financed deal, there are risks. If you have read this far thank you.
Have you ever done a seller financed deal and if so, what did you do to protect yourself from being burned?

 

[Car-Guy]

You need a good lawyer and good contract.

 

[RetiredHappy]

I would take the lump sum and pay 1 year of unsubsized ACA plan. A bird in the hand is worth 2 in the bush. I take no chances as I much prefer to get the money now. If the buyer runs it to the ground in the second year, you may not get anything beyond the first installment. Take the money and run!

 

[calmloki]

We've sold a number of properties on contract, mostly rentals, but if I read you right you are selling a business, so no security?
Selling a property we keep a first position interest, so our main concern is that our buyer have enough skin in the game that they can't avoid paying property taxes or bills, run down the rental, and walk away in the midst of a property value downturn, leaving us holding the bag..

Selling a business I'd imagine you would want the sale agreement signed by the buyer, "Joan's Demolition Supply, LLC.", and a separate document signed by Joan Hardcore acknowledging personal responsibility for that agreement and guaranteeing repayment.

But yeah, what Car-Guy said.

 

[Stormy Kromer]

I sold my business on a 100% seller financed contract on January 1, 2016. No money down at 4.5% interest rate on a 10 year note. This was a service industry where most of the value was based on the future earnings. I had a professional appraisal and sold it to an employee at the lowest end of the appraisal range.

If I could have gotten a cash offer I would have went that route instead, but seller financed deals are the norm in this industry and the only way my preferred successor could buy the business.

As mentioned I hired a professional appraiser ($5,000) and an experienced law firm ($6,000) to set up the contract. The loan was recorded and I had a hammer clause to repossess if a payment was 30 days late. I was 50 years old and kept my licenses so I could have gone back and ran the business if needed. Thankfully it wasn't.

I insisted that the monthly payments be set up on an EFT sent directly to my bank account. It worked fine for 6.5 years into the 10 year contract and then he needed to refinance during a divorce. He had enough equity in the business by then to get a bank loan and he paid me off for the remaining balance. I paid the CG taxes and invested the remainder. I slept better immediately.

Installment sales can work and sometimes its the only option. It may be better than having a retirement sale. I would prefer selling to someone who has experience in the industry and a financial plan that cash flows. If they have experience buying other businesses on a seller financed deal that would be a plus. If they could pledge equity beyond the store, (or a bank letter of credit) that would be even better.

If given a choice I would take a cash deal, pay the taxes and health insurance and invest the rest.

Good luck and keep us posted.

 

[OldShooter]

As a pro bono small business mentor I always advise clients thinking about sales to insist that the seller carry some paper. My argument is that the seller carrying paper says that the seller expects the buyer to succeed. And conversely, if the seller wants to leave the scene he may not have that confidence.

The other thing I suggest is that some of the seller's payment be based on growth in sales. This motivates the seller to be helpful past the sale date. It also sweetens the deal if the seller believes that the bonus payment is reasonably achievable.

 

[Sunset]

We've sold a number of properties on contract, mostly rentals, but if I read you right you are selling a business, so no security?
Selling a property we keep a first position interest, so our main concern is that our buyer have enough skin in the game that they can't avoid paying property taxes or bills, run down the rental, and walk away in the midst of a property value downturn, leaving us holding the bag..

Selling a business I'd imagine you would want the sale agreement signed by the buyer, "Joan's Demolition Supply, LLC.", and a separate document signed by Joan Hardcore acknowledging personal responsibility for that agreement and guaranteeing repayment.

But yeah, what Car-Guy said.

Do you mean a first mortgage ?
And how much skin in the game is enough to make you comfortable the buyer won't flee leaving you to foreclose ?

 

[Rickt]

As Retired happy said (above)
"I would take the lump sum and pay 1 year of unsubsized ACA plan. A bird in the hand is worth 2 in the bush. I take no chances as I much prefer to get the money now. If the buyer runs it to the ground on the second year, you may not get anything beyond the first installment. Take the money and run! "

+1

 

[Yoheadden]

You need a good lawyer and good contract.

Thank you for the reply. I couldn’t agree more. I’m trying to find not only a good attorney, but one that is familiar with these types of deals.

 

[Yoheadden]

I would take the lump sum and pay 1 year of unsubsized ACA plan. A bird in the hand is worth 2 in the bush. I take no chances as I much prefer to get the money now. If the buyer runs it to the ground in the second year, you may not get anything beyond the first installment. Take the money and run!

Thank you for your response. There is no doubt there are many risks going this route. Sometimes just life happens. This is why I am trying to look at it from every angle.

 

[Yoheadden]

We've sold a number of properties on contract, mostly rentals, but if I read you right you are selling a business, so no security?
Selling a property we keep a first position interest, so our main concern is that our buyer have enough skin in the game that they can't avoid paying property taxes or bills, run down the rental, and walk away in the midst of a property value downturn, leaving us holding the bag..

Selling a business I'd imagine you would want the sale agreement signed by the buyer, "Joan's Demolition Supply, LLC.", and a separate document signed by Joan Hardcore acknowledging personal responsibility for that agreement and guaranteeing repayment.

But yeah, what Car-Guy said.

Thank you for your response. If I understand correctly, having first position means you basically have first dibs on getting your money back if things went south.
One of the things we are considering is having her sign a personal guarantee.

 

[Sunset]

Thank you for your response. If I understand correctly, having first position means you basically have first dibs on getting your money back if things went south.
One of the things we are considering is having her sign a personal guarantee.

I have no experience with this, but I bet a personal guarantee is pretty hard to collect upon as it's not a physical asset to grab and what would be the value if the person declared bankruptcy ?

 

[MarieIG]

I have no experience with this, but I bet a personal guarantee is pretty hard to collect upon as it's not a physical asset to grab and what would be the value if the person declared bankruptcy ?

The business going belly-up and the principal declaring bankruptcy would be my concern.

 

[Yoheadden]

I sold my business on a 100% seller financed contract on January 1, 2016. No money down at 4.5% interest rate on a 10 year note. This was a service industry where most of the value was based on the future earnings. I had a professional appraisal and sold it to an employee at the lowest end of the appraisal range.

If I could have gotten a cash offer I would have went that route instead, but seller financed deals are the norm in this industry and the only way my preferred successor could buy the business.

As mentioned I hired a professional appraiser ($5,000) and an experienced law firm ($6,000) to set up the contract. The loan was recorded and I had a hammer clause to repossess if a payment was 30 days late. I was 50 years old and kept my licenses so I could have gone back and ran the business if needed. Thankfully it wasn't.

I insisted that the monthly payments be set up on an EFT sent directly to my bank account. It worked fine for 6.5 years into the 10 year contract and then he needed to refinance during a divorce. He had enough equity in the business by then to get a bank loan and he paid me off for the remaining balance. I paid the CG taxes and invested the remainder. I slept better immediately.

Installment sales can work and sometimes its the only option. It may be better than having a retirement sale. I would prefer selling to someone who has experience in the industry and a financial plan that cash flows. If they have experience buying other businesses on a seller financed deal that would be a plus. If they could pledge equity beyond the store, (or a bank letter of credit) that would be even better.

If given a choice I would take a cash deal, pay the taxes and health insurance and invest the rest.

Good luck and keep us posted.

Thank you for the reply and congrats on selling your business.
We could put in a clause to get the business back, but would prefer not to get it back. The interest is a nice benefit and by seller financing, it makes it easier on the business to pay you back.

 

[Yoheadden]

As a pro bono small business mentor I always advise clients thinking about sales to insist that the seller carry some paper. My argument is that the seller carrying paper says that the seller expects the buyer to succeed. And conversely, if the seller wants to leave the scene he may not have that confidence.

The other thing I suggest is that some of the seller's payment be based on growth in sales. This motivates the seller to be helpful past the sale date. It also sweetens the deal if the seller believes that the bonus payment is reasonably achievable.

Thanks for your reply. It is good advise to give to potential buyers. We definitely believe in the abilities of the buyer or we wouldn’t even consider her. We also want the business to continue for our customers. We have let her know she can ask us anything, at anytime to keep the business going. She’s actually been buy a couple of times since our original meeting to asks questions and just “take it all in”.

 

[Yoheadden]

As Retired happy said (above)
"I would take the lump sum and pay 1 year of unsubsized ACA plan. A bird in the hand is worth 2 in the bush. I take no chances as I much prefer to get the money now. If the buyer runs it to the ground on the second year, you may not get anything beyond the first installment. Take the money and run! "

+1

Thanks for the reply and that’s still a possibility. I’m just in the information gathering phase now.

 

[RetiredHappy]

We sold our somewhat complexed business all in 3 months, with condition that we get paid and be done with it. We had 3 interested buyers, all offering the same asking price and we picked the one where we would be out at the end of the transition period. One wanted us to stay on for 3 years and we would be paid through the 3 years. One wanted us to stay on a year. We were always available for questions after the sale but we left competent staff to help the new owner continue to run the business without us.

 

[Stormy Kromer]

Support of the seller is important. That said, I have also seen a couple seller financed sales fail because the seller stayed too involved and the buyer said to heck with it and walked out.

 

[Hyper]

By the grace of the great Lord, being self made is huge. I look at everything as how I would do things. Id kill myself to succeed at a task I set out to achieve. I've met extremely few others in life that would do the same. Which is unacceptable. It's a HUGE NO for me. If lending institutions won't risk backing them , you shouldn't either!

 

[Koolau]

When we first started to think about selling the family business (a small retail store) we got little response. Most people we thought would be interested thought they could simply start such a business themselves. After all, that's what my parents did all those years ago.

As it turns out, many of these folks did exactly that and had a short to medium run before they bailed out. They found out what we learned. It's easier to get into a business than it is to get out.

IIRC there were something like 20 such businesses started in the time frame. Not one remains, but our business is still quite successful in the hands of our buyer. It turns out that reputation and momentum are good things when it comes to some businesses.

We finally sold to the 3rd generation at very favorable terms (we held the paper but we DID use a lawyer to write up the agreement.) We spread payments out over 10 years and charged no interest.
In essence, we sold the land, buildings and equipment and did not charge for the successful name. Heh, heh, now our niece is looking at FIREing herself. I'm wondering how she will accomplish what we accomplished in selling out rather than simply going out of business. I guess we'll see.

 

[Yoheadden]

We sold our somewhat complexed business all in 3 months, with condition that we get paid and be done with it. We had 3 interested buyers, all offering the same asking price and we picked the one where we would be out at the end of the transition period. One wanted us to stay on for 3 years and we would be paid through the 3 years. One wanted us to stay on a year. We were always available for questions after the sale but we left competent staff to help the new owner continue to run the business without us.

Thank you for the response and congrats on selling your business. I can imagine that it’s quite a weight lifted once you are free and clear from the sale.

 

[Yoheadden]

When we first started to think about selling the family business (a small retail store) we got little response. Most people we thought would be interested thought they could simply start such a business themselves. After all, that's what my parents did all those years ago.

As it turns out, many of these folks did exactly that and had a short to medium run before they bailed out. They found out what we learned. It's easier to get into a business than it is to get out.

IIRC there were something like 20 such businesses started in the time frame. Not one remains, but our business is still quite successful in the hands of our buyer. It turns out that reputation and momentum are good things when it comes to some businesses.

We finally sold to the 3rd generation at very favorable terms (we held the paper but we DID use a lawyer to write up the agreement.) We spread payments out over 10 years and charged no interest.
In essence, we sold the land, buildings and equipment and did not charge for the successful name. Heh, heh, now our niece is looking at FIREing herself. I'm wondering how she will accomplish what we accomplished in selling out rather than simply going out of business. I guess we'll see.

Thank you for the reply and congrats on keeeping it in the family and finally selling it. When we purchased it from DW’s A & U over 20 years ago, they held the note over a 5 year period. We went to an attorney and everything was done legally. I remember it being like buying a house in 5 years.
We approached different companies that we thought might be interested, but for one reason or another, it didn’t work out. No one knows what a business owner goes through except for other owners. It is more of a lifestyle, than a job. We have had enough, but it is definitely bittersweet. Every other day we hear how glad people are that we are here and how beautiful it is. DW and I just look at each other. Ugh

 

[Scrapr]

I sold our (niche) construction business a couple years ago. I had put out feelers to several other construction business owners and nobody bit. So I talked an employee of a construction company we worked with into coming on. He didn't have a lot of business experience. The first year and a half I tutored him on "how we do things & why". Some exposure to the financials. I hired a business coach to help him get his feet on solid ground. Then I turned it over to him with a lawyer contract. He hit the ground running. His first year he had big revenue growth & bigger Net profit % than I ever did. I was a bit more involved that first year too. We are 3.5 years into the contract & I barely go in now. I was out of town last month so he texted me that he deposited my check at the bank.

Overall it's been a great thing. Looking backwards I might have changed a few things. I'm super happy for him. He has bought a house w some acreage after living in a condo for years. I'm going to miss that check coming in like clockwork. But it lines up with my SS @70 years old so it will work out

 

[pb4uski]

I agree with others suggesting to just take the lump sum. With the lump sum you cut out the possibility of ever having to take back the business.

My dad sold a couple of his car washes and did seller financing... a few years later he owned them again. I'm not sure if the buyer just stopped making payments or was unable to make the payments (I was in college at the time so not living at home).

In another instance he sold land under an installment plan and that worked out fine.

So I vote for the clean exit (lump sum) but if you do go for an installment sale (seller financed) get as much down as you can so the buyer has an incentive to make the payments.

 

[Qs Laptop]

It's a HUGE NO for me. If lending institutions won't risk backing them , you shouldn't either!

Many banks will make loans for business purchases at less than 100% of the asking price, especially SBA (Small Business Admin) bank loans. SBA loans are typically 60%-65% of the price. While this likely too big a deal for an SBA loan it's very common for the bank to want some other "skin in the game".