For the most part, sellers don’t care much about where a buyer’s financing comes from. There are plenty of options for buyers, such as Private Equity, cash, traditional loans, or government-backed programs like SBA loans or ROBS (Rollovers for Business Startups), a financing solution that uses retirement savings to fund a new or existing business without withdrawal or tax penalties.
But there is one source of financing that matters very much to an owner: seller financing; AKA, holding a note. A request for seller financing is very common, especially in smaller deals, so it’s important that sellers understand the risk it adds to the deal.
Even a well-financed buyer may want you to have skin in the game after the sale. If you’re responsible for 10-15 percent of the deal, you’ll be more invested in the ongoing success of the business. You’ll be more likely to answer the phone, answer questions, and offer advice. You’ll make sure there’s a smooth transition for customers and employees, who might be reassured by knowing that you’re still a partner in the company, even if you’re no longer in charge of day-to-day decisions. You might be helpful to the new owner in solving problems or avoiding costly mistakes. Most sellers’ notes are held for less than five years, during which time you’ll also be earning interest on your money. These deals defer your final payout, but they give the business a better chance of sustained success.
If your financing is part of an SBA down payment, you may not be repaid in full for 10 years. Many sellers aren’t aware of this policy, so it’s important to ask your buyer how much they are putting down on an SBA loan. If it’s less than the full 20 percent, lenders will consider your note to be what makes up the remainder of the down payment. That means you won’t be repaid until the SBA loan is paid off, which usually takes 10 years. If the new owner defaults on the loan, you will be the secondary creditor behind the SBA. And since HVAC companies don’t have many assets for creditors to seize, your cash investment will almost certainly be used as payment for the foreclosure.
The highest risk proposal: 100 percent seller financing. If a buyer is asking a seller to become the bank, it’s usually a sign that they may not be financially qualified to buy the business—or, if they are qualified, do not want to use their own money. Seller’s notes are common in many deals, but in this scenario, the seller is assuming 100 percent of the risk. No matter what your terms are, if the new owner defaults, you receive nothing. Of course, you’d be entitled to take back the business, but it’s now a few years older (as are you), and you may not have the same asset you left behind. Staff turnover, aging equipment, and business errors may mean you’ll have to start over again to build a business that someone will be willing to buy.
Because seller financing is so common in today’s economy, it’s important to consider both the sale price and the terms of the offer carefully before you accept an offer. That is why it is important to get as many eyes on your listing as possible to get comparable offers. When you have more than one serious offer on the table, you can make an informed decision about the amount of risk you’re comfortable taking on.
