Financing The Purchase

Question:

I am looking at buying a business where the seller is offering 30% owner financing. How is this typically structured? What are the standard variables and negotiating points?

Answer:

While seller financing is something you always want in a deal, I would suggest that you shoot for at least 40%.

Although deals vary, the note should generally be for five years, at around 6% – 8% with the ability to prepay at any time.

I would also recommend:

  • Starting the payments 60-90 days after closing with no interest penalty for this period

  • Have the ability to pay down the principal sums at least twice per year.
  • The loan is to be secured by the assets of the business and no personal collateral (i.e. your house). While you will have to sign personally, do not pledge any personal assets. After all, if the business is as good as the seller has most likely represented it to be, then he/she should have no problem securing his note against these assets.
  • As a side bar, if the business proceeds well in the future and you can afford it, approach the seller and offer to pay off the note immediately for a sizeable discount (at least 20%).

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