When a client agrees to seller financing, they become a lender to a business they no longer control, and that shift is a credit decision as much as a deal term. Many owners picture a single check at closing, yet a meaningful share of deals include some form of seller financing.
The structure can widen the buyer pool, but it can also leave a seller waiting on payments from a business they have no say in running. Weighing that tradeoff before negotiations begin puts clients in a stronger position.
A recent article from Exit On Top breaks down how seller financing works, when it makes sense, and when it does not.
Here is what advisors working with owners considering a sale need to understand:
A Request for Seller Financing Tells You Something
With seller financing, the buyer pays part of the price at closing and repays the remainder through a note over an agreed period, usually with interest. Buyers often ask for it because there is frequently a gap between what a bank or SBA loan will cover and the full purchase price. It is especially common with smaller deals and first time buyers.
Advisors should treat the request as information about how the buyer’s financing is built, which shapes how the rest of the deal should be evaluated.
The Benefits Are Real, and So Is the Tax Conversation
Offering financing can open the business to a wider pool of qualified buyers, which can mean a stronger overall offer than an all cash buyer would bring. It can also signal to a buyer and their lender that the seller has confidence in the business’s ability to keep performing.
Spreading proceeds over several years instead of receiving a lump sum can also affect how the gain is taxed. That belongs in a conversation with the client’s CPA well before terms are negotiated.
Underwrite the Buyer and Secure the Note
Once control changes hands, repayment depends on someone else running the business well. If the buyer struggles or the business underperforms, the seller may not collect the full amount owed.
Seller financing tends to make the most sense when the buyer has a strong track record and a credible plan, and when there is an otherwise unbridgeable gap between available financing and the asking price. It makes far less sense when the buyer’s financial strength or experience is unclear or when there is no meaningful security behind the note. Attorneys and M&A advisors should press for real protection, such as a lien on business assets or a personal guarantee.
Settle the Liquidity Question Before the LOI
Seller financing makes far less sense if a client needs full liquidity at closing. Wealth planners can clarify that need early. It often works best as one piece of a larger structure alongside cash at closing and sometimes an earnout, and it should be structured as part of the overall deal, not as an afterthought.
Deciding ahead of time whether a client is open to seller financing, before LOI negotiations are underway, lets them use it to their advantage rather than feel pressured into it.
Seller financing touches credit risk, tax treatment, legal protection, and personal liquidity. When M&A advisors, CPAs, attorneys, and wealth planners work through those questions together, clients enter negotiations with a clear position, which is exactly the kind of multidisciplinary collaboration XPX was built to encourage.
Read the full article here:
What Is Seller Financing and When Does It Make Sense?
