How owner finance works
We buy businesses to help owners transition into retirement. Roaff maximizes owner’s financial return and provides a seamless option to transition out of day-to-day duties.
Seller finance
About owner finance
Seller financing, also known as owner financing, is a method of financing a business purchase where the seller (the current owner of the business) agrees to accept a portion of the purchase price in installments rather than receiving the full amount upfront. This method can be beneficial for both the buyer and the seller, particularly in situations where traditional bank financing may be difficult to obtain or creates a lengthy and complex process.
Here’s how seller financing typically works when selling a business:
Negotiating the Terms
- Down Payment: When selling your business, the first step is agreeing on a down payment. This initial payment is usually 0% to 10% of the total price depending on the businesses financial situation and broader circumstances (in extraordinary we may consider higher a down payments) . It gives you some immediate cash while the buyer (us, potentially) secures a stake in the business.
- Loan Amount: The remaining balance after the down payment becomes a loan that you, the seller, agree to finance. This amount is paid back over time by the buyer.
- Interest Rate: The interest rate on this loan is mutually agreed upon. Since you’re offering financing, this rate may be higher than a traditional bank loan to reflect the associated risk.
- Repayment Terms: Together, we’d decide on a repayment period, typically between 3 to 7 years, with regular payments (monthly or quarterly) scheduled. There may also be a balloon payment at the end, where a larger amount is due.
Legal
- Promissory Note: The buyer signs a promissory note, which is a formal agreement to repay the loan under the agreed terms. This document will include all key details like interest rates, payment schedules, and penalties for missed payments.
- Security Agreement: To protect your interests, a security agreement might be put in place. This gives you the right to reclaim the business or specific assets if the buyer defaults on payments.
- Personal Guarantee: You might require a personal guarantee from the buyer, meaning they would be personally responsible for the debt if the business itself can’t cover it.
Closing the Deal
The transaction is finalized when the buyer pays the down payment, and you transfer ownership of the business. At this point, you would retain a lien on the business or certain assets until the loan is fully repaid.
Payment and Ownership Transfer
- The buyer takes over the day-to-day operations of the business and starts making payments according to the agreed schedule. Over time, as payments are made, the buyer’s equity in the business increases.
- Once the loan is fully paid off, any liens are released, and the buyer assumes full ownership.
Benefits and Risks
For the Buyer:
- Easier access to financing, particularly if traditional loans are difficult to obtain.
- Potentially lower upfront costs, making the purchase more feasible.
For the Seller:
- The ability to sell the business more quickly, particularly if the buyer can’t secure full financing elsewhere.
- The opportunity to earn additional income through interest on the loan.
Risks for the Buyer:
- The interest rate on seller financing might be higher than bank loans, requiring careful financial management.
- The possibility of cash flow challenges in keeping up with regular payments.
Risks for the Seller:
- There’s a risk that the buyer might default, which could require you to take back the business or assets.
- Payment of the full purchase price is delayed, which could impact your financial plans.
Seller financing can be a flexible and beneficial arrangement for both parties if the terms are clearly understood and mutually agreeable. It’s essential to ensure you are adequately represented by legal and financial professionals to ensure that the terms are fair and in your best interest.