I own a small retail shop and I'm planning to sell it next year. A few buyers have asked about seller financing, but I've never done it before. What are the actual mechanics? Do I need a lawyer to draft the note, or can I use a standard template? Also, how do I structure the down payment and interest rate so I'm not taking on too much risk? Any advice from people who have done this would be helpful.
seller financing
How to set up seller financing when selling your shop
I've done two seller-financed deals, one for a bakery and one for a hardware store. Get a lawyer who specializes in business transactions, not just a general practitioner. The note itself can be boilerplate, but the security agreement and UCC filing are where you can get burned. Also, make sure you personally guarantee nothing unless you absolutely have to.
How big is the down payment typically? I'm looking at buying a shop myself and the seller wants 50% down which seems insane.
Fifty percent is high for a small shop, but not unheard of if the business has shaky financials or the buyer has no experience. I'd say 20-30% is more common. But it really depends on the purchase price and whether inventory is included.
I sold my auto parts store with seller financing five years ago. The The biggest lesson: don't be the bank for someone who can't show you two years of tax returns. I ignored that and spent eight months chasing payments.
This is a topic I've been researching too. From what I've read, you should also think about what happens if the buyer defaults. Do you repossess thhe business? That's a lot messier than repossessing a car. A lawyer can help you draft a default clause that gives you the right to step back in and take over operations, not just seize assets.
I used a promissory note template from a legal website for a small equipment sale once andd it worked fine, but for a whole business I'd hire a pro. The cost of a lawyer is nothing compared to losing the business because of a missing clause.
Exactly, rusty. And quill, good point about default. One thing I'd add is to require the buyer to carry insurance with you as a loss payee. That way if something happens to the shop, you're not left holding a note with no collateral.
Appreciate the responses. So the consensus is lawyer up and don't skimp on the down payment. What about interest rates? What's fair right now?
I charged 7% on my deal. That was a few years ago. It depends on how much risk you're taking. If the buyer is putting down 30%, maybe you can go a bit lower. But don't go below what a bank would charge, or you're just giving them a gift.
There's also the queston of whether the note is assumable. If the buyer wants to sell the business later, can they transfer the note? That can be a big deal for them, and you can negotiate a fee for assuming it. Just something I hadn't thought of until I read a sample contracvt.
One more thing: make sure the note is recorded with the state or county if it's secured by real property. For a shop leaase, it's trickier. You might need the landlord's consent to assign the lease. That's a whole separate headache.
Thanks everyone. I've got a call with a business attorney next week. I'll ask about the UCC filing and the insurance clause. The point about the note being assumable is interesting too. I'll bring that up.
Good luck with the sale. One last thought: keep meticulous records of every payment. If you ever need to enforce the note, a clean payment history helps.