If your plans involve buying a business from a current owner, there is an option worth exploring: owner financing. With owner financing, the seller will hold the note and you’ll make payments to this individual. Let’s take a look at how this option could work for you.
Definition
Owner financing is often referred as seller financing — the two terms are precisely the same. In this situation, the seller agrees to finance the business, usually by holding a promissory note from you covering a slice of the selling price.
Another option is for you to come up with a down payment and have the seller finance the balance. In both case the seller will have a lien on the business until your loan is paid off.
Advantages
When your resources are limited and other financing options are limited or simply too expensive (i.e., high interest rates and short terms), owner financing is an attractive option. Moreover, you’ll be working with the person who will still have a stake in your business.
Owner financing can be advantageous to the seller too. Especially if selling the operation has been a challenge in a market where few serious bids have been made. The owner may prefer to see the sale concluded by traditional means, but with financing he is assured of a monthly payout as you manage the business.
Disadvantages
With the previous owner maintaining effective control of your business, you must answer to the person who is intimately familiar with its day-to-day operation. He may insist on maintaining a certain amount of oversight (i.e., review of your financial records) while you run the business.
You should also know that if you default on the note or loan, you’ll forfeit your business. The seller may take back the business the moment you slip up. This is where you need to have your attorney review your agreement.
Your Bank
You can also make an arrangement where your bank provides part of the financing and the seller the rest. In this example you would take out a loan and provide a promissory note to the seller. With the note you agree to pay the note on a specified date or on demand.
For instance, if you agree to an amount of $125,000 and put $25,000 down, you might have the bank finance $80,000 with the seller hold a promissory note for $20,000. The financial arrangement that you, your bank and the seller come up with can be highly creative. Just make certain that you, your attorney, and your accountant are on the same page and that you have the wherewithal to make this business succeed.
See Also — Working Capital Challenges and Your Small Business
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