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Seller financing is a common and often effective component of a transaction. Like any part of a deal, its success depends on how it’s structured and how well it aligns with the business itself.
Rather than being “good” or “bad,” seller financing simply requires thoughtful consideration in a few key areas:
Clarity around the business itself
Regardless of structure, a transaction should be grounded in a clear understanding of the business. Financial performance, customer concentration, margins, and operational dependencies all matter. Seller financing does not replace diligence—it sits alongside it.
Quality and consistency of financial information
Incomplete or inconsistent financials don’t necessarily prevent a deal, but they do introduce additional variables. When financial reporting, tax returns, or documentation are unclear, it becomes more important to align expectations and structure accordingly.
Alignment of terms with the business
Seller notes are negotiated as part of the overall transaction, not in isolation. The interest rate, amortization, and term should reflect the business’s performance and the broader capital structure. Well-structured terms support the buyer’s ability to operate the business while still providing the seller with a defined return.
Defined transition expectations
A successful transaction extends beyond closing. Clarity around transition support—whether short-term or ongoing—helps maintain continuity with employees, customers, and operations. The right level of involvement varies, but alignment up front is important.
As we have discussed in other articles, many SBA loans feature seller financing, even just a token amount, as part of the transaction. A good business is a good business, no matter the interest rate environment. However, when interest rates are rising, underwriters will look at cash flow, add projected debt service, and see that there simply isn’t enough cash flow to cover the higher debt resulting from those higher interest rates.
Seller financing is often used to bridge gaps in a transaction and align incentives between buyer and seller. When approached with discipline and clear expectations, it can be an effective tool in getting deals done.
Whatever role you want seller financing to play in your transaction, as a buyer or a seller, we are here to help.