Once you have decided to sell your business with owner financing, you may want to find a good business broker to help you find potential buyers. Of course, an experienced business attorney will also be a key partner for you in the business sale. Team members like these can help you to objectively understand your business, what the selling process and closing process will look like, and how you should weigh the opportunities and risks. Of course, your team will also want to help protect you financially and legally.
Once you have found a buyer for your business, it will be important to have your attorney prepare all relevant documents for you. Two of the most important documents will be the promissory note and the security agreement. The note shows the amount being owner financed, the payment amount, the interest rate, what happens in case of default, etc. When the transaction is completed, you will want to keep the original note in a secure location (a safe or safe-deposit box is a good place). The security agreement shows the assets, inventory, etc. that is the collateral for the note. Having well-done documents protects you in case there are issues down the road, and will help to make the note more marketable should you decide to sell it later.
Be sure that the buyer has the skills and experience to run the business. A buyer without true expertise is less likely to keep the business successful and thus make payments on the note. If you have certain concerns, ask your attorney about adding loan covenants and being able to regularly audit the company financials. You may even want to include in the documents that you have the right to occasionally check with major customers to make sure that the business is performing as it was when you left it.
Although a 10% down payment is suggested above, obtaining an even bigger down payment makes the note safer and more marketable for you, as it lessens the chances of a later default. If the buyer is capable of putting in a down payment of 20% or even 40%, that would be helpful. Make sure that the down payment is all cash and not consisting of other assets or like-kind items. A business note buyer won’t give full credit on a down payment that is not all cash.
Be sure to check the payer’s credit, and don’t take their word for it. Run a credit report to get the true number. A business note buyer will want a credit score of at least 625 but a much higher score will help you to get a better price for your note.
Related to the buyer’s credit is to make sure that the buyer personally guarantees the note. This gives you more assets to pursue if there is ever a default or other issues. A corporate or LLC guarantee could leave you with very little if the business goes under.
Because you are offering owner financing, the interest rate charged should be several points higher than existing mortgage rates. For instance, even if current mortgage rates are 5-6%, the rate on your note should be in the 9-12% range. This higher rate reflects the amount of risk that you are taking on.
Be sure that you document all payments and keep copies of checks or bank statements. Doing this will help in case of any disagreement about the note balance, and will be essential to any buyer of business notes.