Hey all, I'm getting close to selling my small commercial cleaning company (about $1.1M revenue, decent margins). Buyer is interested but wants me to carry a note. I've never done seller financing before. How do I structure this so I don't get completely screwed? What kind of terms are normal? Do I need a lawyer to draft the note or can I find a template online? Any advice appreciated.
Seller Financing
How to structure seller financing when I sell my business?
Do NOT use a template. Get a transactional attorney who does M&A. The note is the easy part; the security agreement and default provisions are where people get burned. I've seen sellers use LegalZoom docs and then find out they had zero recourse when the buyer stopped paying.
Second this this. The note is the easy part; the security agreement and the personal guaranty are where the teeth live. No guaranty = you're an unsecured creditor if the buyer runs it into the ground.
How much are we talking? 10% seller note on a 1.1M deal is very different from 40%. If the bank is financing most of it, your carry is basically just bridge money and you have more leverage to dictate terms.
We did 20% seller carry on a smaller deal and honestly the monthly check is nice but I regret not taking a personal guaranty. Live and learn.
Amortization schedule, maturity date, and interest rate. Those three are your whole world. A lot of buyers will try to hand you a note with a 10-year amortization but a balloon at year 1, which is basically a setup for them to refinance or walk.
Also watch for "seller note subordination." If the bank wants you subordinate to them, that's standard, but you want to make sure the subordination agreement is tight. You don't want to find out at the last minute you can't collect while the bank takes everything
lol @ "amortization schedule" I'm still on the "how do I get someone to buy my lawn care route" stage. following this thread.
Solid replies, thank you. So I should get a lawyer and a personal guaranty. The dry cleaner comparison actually helped. Anyone have a specific interest rate range to negotiate from? I keep hearing 5-8% and also self-directed IRA rates.
Depends what state and what bank. If you're subordinating to a bank, their terms dictate yours. If you're the only lender, you have way more room. Don't overthink it till you know who's first in line.
No idea what "self-directed IRA rates" means and I suspect neither does whoever told you that.
One thing nobody mentioned: personal guaranty doesn't do much good if the buyer has no assets outside the business. Sometimes people start pushing for a "full recourse" loan to the buyer personally, which is more aggressive. Get comfortable with the fact that seller financing means you are in bed with the buyer for years.