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What Happens If My Business Buyer Doesn’t Pay on Seller Financing?

Posted by John Fairchild in Articles

It’s no surprise that many buyers like to include seller financing when purchasing a business. But what happens when a buyer opts to purchase a business, has a seller note, and is no longer available to make payments in the future? There could be consequences for a seller who defaults on a seller note. This can also be a much different and unfortunate experience in the event that a business seller is asking this question because it is likely that the person who is responsible for making payments on the business has now missed the last few that are owed.

Who Does Seller Financing Make Sense For?

Buyers love seller financing because a seller being willing to extend a note on the deal requires that buyer brings less cash to the closing table. Purchasing a business that is already bringing in income means that a business could be used to pay out the portion of its own acquisition price. Therefore, the buyer of the business can leverage a larger business with less money down.

Many buyers who use seller financing do so to keep the seller invested and involved in the future success of the business, giving the seller peace of mind that the company will likely be kept running as effectively as possible. A final reason why seller financing has become so popular is that many buyers see sellers who are willing to offer financing as an investment in the confident future success of the company.

Why Do Sellers Dislike Seller Financing?

As much as buyers find it appealing to use seller financing to purchase a business, many sellers hate offers that contain seller financing. Sellers don’t love owner financing because if a buyer defaults, enforcing the payments can be expensive and frustrating. For them, where they don’t know if the new owner will make bad business decisions that could affect the ability of a company to continue growing.

Since there is very little real collateral, this can prove problematic when a buyer does not take next steps to make their payments and it often does not make financial sense for the seller to use this.

How Can I Tell Whether I Can Trust the Buyer Not to Mess Up Seller Owned Financing?

After a seller evaluates the potential enforcement issues that are raised by seller owned financing, their thoughts will naturally move to the buyer, such as;

  • Whether or not the buyer is truly competent to run the business.
  • Whether or not the buyer has the experience to do something catastrophic that could destroy earnings and minimize the ability to repay the loan.
  • Whether or not the buyer can be trusted not to try to avoid future payments.

One of the biggest problems has to do with collateral because if an owner is selling their business, they are typically ready to move on to up their pastures and if someone begins to miss payments, the chances are that this is due to the business suffering in some way which could spell other troubles. If you are curious about how best to protect yourself in any form of financed sales, you should speak with an experienced business broker immediately.