A Practical Guide to Seller Financing

A Practical Guide to Seller Financing

A Practical Guide to Seller Financing

Selling a business is one thing, getting paid on the sale is another.  The options available for financing the deal are dependent on the business and the buyer. Here are some things to be aware of if you find yourself with a chance to sell your business.

Seller Financing:  The good, the bad and the uh oh

Seller Financing as the ONLY Financing

The Good:

  1. Seller provided financing opens the sale up to a wider range of buyers (though not necessarily higher quality buyers).
  2. Without a 3rd party lender (SBA, Bank, etc) the deal can likely get to closing faster than if bank financed
  3. Buyer usually isn’t as price sensitive since there usually isn’t a 3rd party valuation
  4. You may be able to cross-collateralize or obtain cross default agreements to tie up assets.
  5. If you get a personal guaranty from buyer you may have better chance to get paid.

The Bad:

  1. If the buyer defaults on the note it can be expensive to try to collect
  2. If you worry as much about the note payment as you did about the business are you any better off?
  3. Unless done properly there can be all kinds of tax issues

The Uh, Oh:

  1. If the buyer has a lease on facility you may need a landlord subordination agreement or you won’t be able to get to the collateral or worse, you might have to pay the back rent in order to get to your collateral.


  1. Get the landlord subordination agreement at the time of the sale.
  2. If you can, cross default the lease and note so that if buyer is in default on either they are in default on both.
  3. Make certain to file a UCC1 on the collateral assets so the whole world knows your note needs to be paid before the assets can be sold.
  4. Try to get a really high default interest rate on the note so that the financial pain of default is high.
  5. Consider a sub-lease to the buyer rather than buyer getting a new lease. That way you retain control of the facility and can act faster if you need to intervene.
  6. Try to get collateral other than business assets. Does buyer have a vacation home? Other assets?
  7. Guarantors – get as many guarantors as possible also make sure spouse signs guaranty if required in your state.
  8. Require buyer to provide financial statements and tax returns to you for as long as the buyer owes you money so you can keep an eye on the business health.

Seller Financing with Other Types of Financing

SBA Loans with subordinated Seller note:

The Good:

  1. The Bank is likely to screen the buyer more thoroughly than most sellers
  2. The seller note is likely to be less than 10% of the total selling price.

The Bad:

  1. The bank will look very carefully at the business cash flow (several years), seller financials need to be in good order.
  2. Bank will require a 3rd party valuation to make sure the price the buyer and seller agreed to is fair.
  3. SBA limits any “after the sale” arrangements between buyer and seller.
  4. The seller note will likely have a period (usually 2 years) whereby the seller gets NO payments and only interest accrues.
  5. If buyer defaults on seller note the Bank will limit what actions the seller can take to get paid.

The Uh, Oh:

  1. Because of the restrictions in the bank subordination agreement the seller note is usually the first obligation that goes unpaid.
  2. If the seller stops paying you it’s usually a sign of other significant problems with the business.
  3. If the buyer stops paying the note the seller recourse is basically limited to enforcing the personal guaranty.

Revolvers (also known as Asset Based Loans) – with associated seller note

Definitions: a “revolver” is a bank loan or financing company loan that gets adjusted every month (or week or even day). These revolvers are tied to accounts receivable (a/r) and/or inventory and are a % of those items. For example a common revolver term is a bank loans the business up to 70% of current accounts receivables and/or 20% of good inventory at cost.  (The a/r % is high because a/r is highly liquid and can be collected quickly. Inventory is much more difficult to liquidate and has high costs associated with liquidation i.e., warehousing, transportation, auction costs etc.)

The Good:

  1. A revolver is flexible in that if funds cashflow when the business is growing.
  2. A revolver usually has fewer covenants.
  3. The “credit worthiness” of the business is less stringent than normal bank standards

The Bad:

  1. The seller note will lose a/r and inventory as collateral.
  2. The revolver lender usually can “pull the plug” at any moment
  3. The cost to the borrower can be significantly more expensive than an SBA term loan.

The Uh, oh:

  1. Revolver loans normally have many fees and opportunities for lender to squeeze a few more dollars out of borrower
  2. Revolvers are famous for high cancellation fees if you want out of the deal.

Credit Card Loans Against Receipts – along with seller financing

Description – With these loans a lender “forecasts” your credit card receipts and lends you money in advance, then when the customer credit cards are process for the business sales then the money is redirected to lender to pay off the loan they advanced. Generally speaking these loans are used for retail stores, restaurants, etc with high % of credit cards sales and highly predictable and regular sales. Take the time to calculate the real costs of this kind of financincing, it can get expensive quickly.

The Good:

  1. If you have high volume of regular credit card sales these loans are not difficult to obtain
  2. The cashflow is steady

The Bad:

  1. These loans can be very expensive
  2. The CC lender gets paid before the seller note by taking their money out of the sales revenue.

The Uh, oh:

  1. Because these loans have a claim on all revenue it is very unlikely any other 3rd parties would provide financing.
  2. The process of payment takes control of cashflow out of biz owners hands (which could be a good thing in some cases)

If you are selling a business you’ll need to risk adjust the price depending on the financing structure that the buyer and seller agree to. Also, make sure to get good legal and accounting advice to understand what the net value is. And finally, look closely at the risks associated with any financing arrangements.

Business Valuation as it relates to Business Sale Price Calculation and Working Capital

Business Valuation as it relates to Business Sale Price Calculation and Working Capital

General definition. Current assets – current liabilities = Net Working Capital

In most cases the valuation of a business does not include the net working capital of the business at the time of the valuation. Working capital is often excluded from valuations so that business values can be compared to other similar businesses without the need to adjust for working capital. If 2 businesses are identical except one has $1,000,000 in excess cash it won’t affect the valuation comparison because the excess cash is not in the valuation price for the businesses.

However, the working capital can affect the actual selling price of a particular business if the working capital is included in the sale.


Let’s say Business A is valued at $5,000,000 and business B is valued at $5,000,000, both without working capital. If business A has $700,000 in net working capital and business B has $1,500,000 in net working capital, and the buyer wants to buy the working capital with the business, then business A will sell for $5,700,000 and business B will sell for $6,500,000 even though both were valued at $5,000,000.

Many buyers want to buy a business with adequate or normal working capital. By doing this the buyer has a set amount of capital to raise that allows them to purchase the business. This capital to buy the businesses is likely long term capital. By including working capital in the purchase, after the sale, the business can operate on the purchased working capital.

The larger the transaction the more likely that working capital will be included in the business sale. The working capital target number (i.e., the amount specified in the LOI to be included in the purchase price) is an important negotiated element of a deal. In the LOI it might be a dollar amount or often an agreed to formula (since the working capital moves virtually every day the business is open) to use to get to a working capital number at closing. Make sure all elements of the working capital calculation is defined and understood.

Common Working Capital Elements

(with notes on the tricky ones);


  • Cash and cash equivalents
  • Accounts receivables
  • Inventory
  • Deposits – Deposits business has at vendors or other i.e., tax deposits, lease deposits, etc)
  • Work-in-Progress – Does your accounting system account for this properly? WIP can also be a liability depending on billing practices.


  • Accounts payable
  • Accrued payroll
  • Vacation owed employees
  • Gift certificates Does your accounting system track?
  • Warrantys Outstanding for products or services
  • Prepaid service or maintenance agreements
  • Deposits from customers
Selling a Business: The C Corp to S Corp Dilemma?

Selling a Business: The C Corp to S Corp Dilemma?

Selling a business set up as a C corporation can have some very painful tax consequences.

The following is not legal or tax advice. Consult with your CPA and/or attorney before taking any action

Is your business a C Corporation?


Do you want to pay 50% or more in taxes when you sell your business?

I didn’t think so. If you want to avoid that potential calamity? Read on.

But first, let’s talk a minute about the characteristics of a C corp. A C corp is a legal entity in which a business is operated. An S Corp and LLC are also entities used frequently to operate a business.

The primary difference from a tax perspective is the C Corp profits are subject to “Double Taxation”. Meaning the corporate entity is taxed and then the shareholders are taxed when what’s left is taken out of the C corp by the shareholders.

S Corps and LLCs are often set-up as “pass through” entities meaning there is only taxation at the shareholder or member level (we’ll use shareholder and member interchangeably but there are some differences). There are circumstances where LLCs are taxed as C Corps. Check with your CPA when you establish your LLC to make certain it’s set-up correctly.

Double taxation can be painful

Many business owners have been advised by their accountants over the years to switch from a C corp to an S corp but the business owners have ignored this advise too often. Timing the conversion can have an effect on the impact felt by the C to S conversion. If it comes time to sell your C Corp almost all buyers prefer an asset sale as opposed to buying the stock of your C corp. Therein lies the value trap caused by the double taxation at the C corp level.

Why is important to advisors like us (Mergers & Acquisition advisors and business brokers) who sell businesses for business owners? Because the same “double taxation” on your profits could be a problem upon sale of the business. How would you feel if you spent decades building a business and then when you sell it you get the privilege of paying 50% or more in taxes on the selling price?

How Long does it take to get the S Corp tax treatment after you convert?

There is a look back period in the tax law that is designed so that you can’t just convert your C corp to an S corp at the time of sale and reap the lower tax windfall. The IRS is way too smart for that trick.

The tax code “look back” period has varied in recent years from 10 years to 5 years to 7 years to the current 5 years. Who knows what it might be in the future?

Here are the pitfalls and options:
1) If you don’t plan to sell your business for at least 5 years consider converting from C to S now

2) If you do plan to sell your business in the next 5 years, seriously consider converting from a C to S now

Yes, the advice is the same. Why? Because the look back window starts when you make the conversion and the sooner the clock starts, the sooner you are out from under the C Corp tax burden if/when you sell your business.

Selling a business is more about how much you end up with, not how much you sold it for

What are the steps to convert?

An important first step recommended by most CPAs is to get a Business Valuation done for the C Corp. This valuation captures and locks in the potential C Corp tax burden. Then the value gained above that valuation will not be subject to C Corp taxes in the future. That 10 year or 5 year or 7 year window or whatever other look back period the IRS decides to impose on you.

At the very least talk to your CPA now about converting from your C Corp to an S Corp, I promise, you’ll be glad you did. This tax burden has negatively impacted many business owners because they didn’t act before the issue arose.

Selling a Business in the NEXT Energy Boom

Selling a Business in the NEXT Energy Boom

Those of us who work regularly in and around the oil & gas energy industry recognize the difficulties presented by the current depressed energy prices and it’s effect on energy services, production and exploration companies. We view the world through the process of Mergers & Acquisitions as we work with business owners to sell their companies. Many Texas businesses are heavily impacted by the swings in energy prices. We see machine shops, water disposal, inspections, welding, tank, vessels, trucking, temporary housing and many other energy related businesses that suffer the financial pain when energy prices and production declines. We also see these same companies reap the benefits of rising energy prices and production cycles. Unfortunately too many business owners have short memories.
“When the energy business is good many business owners think it will last forever. It won’t.” Dan Elliott
Like you, we have seen this play out before in different cycles and many energy companies (and related businesses) always seem to recover. Selling a business for the highest value is often driven by timing. Will you be ready when the market is?
If your goal is to sell your business in the next energy boom here are 3 things you can focus on now to make sure your business achieves its highest value in the next energy recovery cycle.

  1. Get your financial reporting up to standards that will one day survive a buyer’s due diligence.
    Excellent financial records increase the value of your business because it reduces the buyer’s perceived risk that poorly maintained financials mean more financial room for error. Make sure your accounting is done consistently from year to year and make sure your current tax structure (C, S, LLC, etc) is what will create the highest value transaction. Look at your financials as a buyer would or better yet give us a call and we can review your information and give you a report that identifies the areas for improvement. Tip: To most buyers Reviewed financial statements are almost as good as audited financials and a lot less expensive. If you have audited great, but if you just have compiled statements find a good business accountant to do reviewed statements.
  2. Work hard on Customer Concentration Issues
    A buyer often perceives risks if 1 or 2 customers dominate the revenue of your business. Ideally your largest customer should be less than 20% of your annual revenue (unless you have long term contracts which assure buyer purchases). Shifting customer concentration is often a long process, start now. Tip: Look at your commission plans for your sales people. Are you rewarding sales people who diversify their customer base?
  3. Review your insurance to be sure you are adequately covered for your business risks
    An under-insured claim is a nightmare for a business owner and can interfere with the sale of the business for many, many years. Do you have enough coverage? Do you have the right coverage? The “right coverage” question is even more important than how much coverage. We had a client get hit with a $2 million claim that he thought he had insurance coverage for. He didn’t. The deal to sell his business that we had on the table for millions of dollars was delayed until he found out he wasn’t covered, then that deal disappeared altogether. Talk to more than one agent and certainly more than just your regular insurance agent who may think they know your business but really don’t. Many commercial insurance agents will be more than happy to give you a review. Tip: Talk to an insurance agent who specializes in your industry. Your trade association knows who they are.
  4. Here’s an article on West Texas Oil industry as oil production continues full bore.

Far too many business owners don’t plan ahead for an opportunity that could arise without much notice. Selling a business for the highest value and best terms is never an accident. The value goes to the prepared.

Top 8 Things Business Owners Do To Crush the Value of their Business


Business Value Can be Managed if the Business Owner Can Manage Themself 




If you read too many business magazines you might find yourself believing that creating a valuable business is more luck than skill. Business value can be managed and if you manage the value you will become more profitable.

Small business owners often confuse business earnings or profit with the actual value of a business. All profits are not created (or valued) equally. A fundamental method of measuring the value of a business is applying a multiple to earnings. Take two businesses that have the exact same earnings of $100,000. Will they have the exact same value to a business buyer? No.

Why not? There are many, many reasons. Here are some examples of why business buyers value earnings differently, we’ll use the $100,000 earnings for company A and B example.


·       What is the quality of the earning? Company A earnings have been growing for 5 consecutive years, company B earnings have been down for 5 consecutive years. Which is more valuable?


·      Company B financial statements are cleaner than company A and a buyer will pay more for a company with cleaner books because there is less risk. Uncertainty in the quality of the business financial records drives down value.


·      Company A has 5 lawsuits against it, company B never had any lawsuits.


·      Company B has well documented processes and it’s easier to train employees, therefore B’s owner can take lots of time off. Company A, with no processes, couldn’t stay open a week without the owner at the business. Which business has lower risk and therefore higher value?


·      I could give you a hundred more variables as to why one business’ $100,000 profit is worth more, or less, than another business’ $100,000 profit.


As you can see business value and corresponding multiples of earnings is based on a number of fundamental factors that a business owner can control and these factors effect how valuable the business is. There are many businesses that are very valuable to the current owner but of little value, or much lower value, to a buyer. There have been several good books written about building value in a small business including Built To Sell.


8 Mistakes Business Owners Make that Hurt their Business Value
Mistake #1: Keep your financial records as obscure and inaccurate as possible to make sure that the IRS can’t figure out if you made a profit. Effect: If the IRS can’t figure out if you made a profit neither will a buyer.

Mistake #2: Don’t know what your competitors are doing, just assume you know what you don’t know. Effect: If you don’t know where your prices or services fit in the market your prices are probably too low. If they are too low you are missing profit. A smart business buyer will know this and buy your business based on your under-achieved profits, they will then increase the prices and make more money from your business than you did.


Mistake #3: Don’t document any systems, just spend 20 hours a day at the business and when somebody needs to know something they’ll ask. Effect: If you get hit by a truck, the business will be in the tank before you’re out of the hospital.


Mistake #4: Let people who you didn’t train….. be the people who train the new guy. Effect: See #3 above.


Mistake #5: Mix your personal finances with your business finances. (Relates to #1 above). Effect: You won’t be able to plan since you don’t know what your real business results are. If your business makes $200,000 but you spend $250,000 it’s the owners fault, not the businesses.


Mistake #6: Don’t get the proper business insurances you need. Example, many businesses who should have product liability coverage..don’t. Often they also fail to obtain adequate umbrella coverage or have policies that don’t adequately cover the risks. Do you know the difference between a claims made policy and an as occurred policy? Effect: Buyers don’t want to be exposed to litigation, which is inadequately insured, created by the business before they buy the business. I have seen more businesses fail due to under-insurance than I’ve seen businesses fail because customers don’t pay their bills.


Mistake #7 – No documented policies related to employees, i.e. vacation, sick pay, etc. Are employees classified as salaried who should not be? Are there 1099 contractors who really should be W-2 employees? Effect: If the best buyer for your business is a big company they will spend a lot of time in due diligence of employment practices and they don’t want to inherit confusion and risk. There is huge risk in poor employee documentation and policy inadequacies. If you have more than 4 employees you should seriously explore outsourcing your HR functions to professionals.


Mistake #8 – Let your customer concentration get out of balance. Meaning one or two customers represent a huge portion of your business Effect: A business with 2-3 customers that do 90% of the business has more risk than a business that has 100 customers each doing 1%. If your top customer does 75% of your business it might be easy for you to manage one customer but if that customer leaves you, you’ll take BIG steps backwards. Try to get your largest customer to represent no more that 10% of your total sales.


While it’s easy to get wrapped up in making a business profitable, always keep an eye on the things that make a business valuable.

I can guarantee every business owner one irrefutable fact. You will exit your business, either willingly or not, but it is 100% guaranteed. 

What other things business owners do to crush the value of their businesses?