Seller financing is a loan you make to the person buying your business, repaid out of the business you no longer control. Structuring it well is about four numbers and one question: how much, at what rate, over what term, with what security, and what happens if the payments stop.
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A seller financing example, number by number
Cash at closing, which should be an amount you would accept as the whole price if the rest never arrived. The principal of the note. The interest rate, which should reflect that you are an unsecured or second ranking lender rather than a bank. And the term, where shorter is better for you and longer is what makes the payments affordable for the buyer.
Security and ranking
Ask for security over the business assets and a personal guarantee from the buyer. Where the buyer also has a bank loan, expect the bank to require your note to be subordinated, meaning they are paid first and you may be barred from enforcing while their loan runs. Read the subordination agreement; it is where a seller note quietly becomes much riskier.
Owner financing: what if the buyer defaults?
Your remedy is what the note and any security give you, subject to any subordination. Practically, taking back a business that has been run badly for two years is a poor outcome, so the real protection is diligence on the buyer before closing and a cash portion large enough that the deal is acceptable without the note. Use a third party servicer so the payment record is neutral.
Other questions people ask
What interest rate for owner financing is normal?
It varies with the market and with your ranking. The principle is that an unsecured or subordinated lender should be paid more than a bank, and accepting a token rate is a discount on the price by another name.
How much should be financed?
As little as the buyer can manage. Treat the cash at closing as the real price and the note as a bet on the buyer.
Should I use a servicer?
For anything long or large, yes. A neutral payment ledger is far better evidence in a dispute than your own records.