Financing Options for Small Business Deals
There isn't one "right" structure. Every buyer and seller trades risk, speed, and price differently. This guide highlights the most common paths—with a practical focus on seller financingand what to watch out for.
Common structures (fast overview)
- Fastest close, lowest risk to seller.
- Usually lowest price vs. financed alternatives.
- Lender funds most; seller carries 5–15% as a standby note.
- Heavier diligence; timing 45–90 days typical.
- Seller receives down payment, carries the rest.
- Max flexibility on terms; also higher seller risk without safeguards.
- Part of price paid only if performance happens.
- Useful when growth claims are unproven.
- Finance trucks/equipment separately; reduces cash at close.
- Assets secure the debt; relatively standard.
- Buyer brings an investor; less debt, more stakeholders.
- Can speed close but adds governance docs.
Seller Financing: what it is & why it's popular
The seller accepts a down payment at closing and a promissory note for the balance, paid over time. It often gets deals done when buyers can run the business but can't (or don't want to) borrow the whole price.
- Down payment (10–40% common)
- Interest rate (fixed or variable)
- Term (e.g., 24–60 months), amortization & any balloon
- Payment timing (monthly; seasonal schedules are possible)
- Security (UCC-1 on assets, titles, personal guarantee)
- Personal guarantee from buyer/owners
- Security interest (UCC-1) on business assets & key equipment
- Landlord consent & assignment rights (for step-in if default)
- Insurance with seller as loss payee; name seller as additional insured
- ACH autopay + monthly financial reporting covenants
Seasonal businesses: match payments to cash flow
If the business operates, say, 7 months a year, consider either (a) payments only during those months, or (b) smaller off-season payments with catch-up in season. The goal is to keep the note serviceable from business cash flow— while still protecting the seller.
Takeaway: Seller financing works best when the buyer respects the playbook that created the cash flow—or when the note includes covenants and remedies if they decide to "change everything" too fast.
Red flags & smart covenants
- Buyer wants radical changes on Day 1 (brand/menu/offer)
- No operator experience and no plan to retain key staff
- Weak personal credit & no guarantor
- No cushion for working capital / seasonality
- Unwilling to share monthly P&L and bank statements
- Operating covenants: no major brand/menu changes for 6–12 months without seller consent
- Reporting: monthly P&L + revenue proof (POS exports) to the seller
- Cash controls: ACH autopay on note; late fees; cure periods; default triggers
- Security & step-in: UCC-1, titled vehicles, landlord consent to assign, domain/phone/brand in escrow
- Training/transition: minimum hours/weeks defined; non-compete/non-solicit as permitted
Seller-note: quick term sheet outline
- Purchase structure: Asset sale (typical) or equity sale
- Price: $[price] ; Down payment: $[down] ; Note: $[balance]
- Interest: [rate]% fixed; Term: [months] months; Amortization: [schedule]; Balloon: $[balloon]
- Payments: $[amount] monthly; seasonal schedule if applicable
- Security: 1st/2nd lien on assets; UCC-1; titles; PG from owners
- Covenants: reporting, no major changes for [months] months, insurance, taxes current
- Default: late > [days] days, [misses] missed payments in [window] months, breach of covenants
- Remedies: late fees, interest step-up, acceleration, step-in/assignment rights
- Transition: [hours] hours training; brand/IP license terms; escrowed logins/domains
- Working capital: target & true-up method at close
This is a conversation checklist, not legal language. Have a qualified attorney & CPA adapt for your jurisdiction/taxes.
Taxes & legal (talk to pros)
- Asset vs. stock: affects depreciation, goodwill, and taxes for both sides.
- Installment sale: spreads gain over years (seller); specifics depend on your situation.
- State rules: some states limit confession-of-judgment; repossession rules differ.
- Licenses/permits/leases: confirm assignability and timing so the handoff is clean.
Important: This guide is general information, not legal, tax, or financial advice. Always consult a qualified attorney and CPA for your specific deal and jurisdiction.