Ready to Provide Seller Financing? A Few Things to Consider…

Here is the scenario:

  1. You’re a restaurateur and are ready to move on.
  2. You own the restaurant’s assets and the real estate where the location sits.
  3. You’ve found a Buyer!
  4. But, the Buyer can only get a conventional loan to purchase the real estate and doesn’t have the cash to purchase the restaurant’s assets.

What now? Enter, seller financing.

What is Seller financing anyway?

The most common type of “seller financing” most people are probably familiar with are “land contracts” (out here in the country, anyway). Essentially, a land contract (or a Note for the purchase of assets) is a loan from the Seller of the assets to the Buyer. In return for use of the assets today, the Buyer agrees to pay the Seller over time, along with interest. Simple, right?

Why is this happening?

In my personal opinion, I think banks and other institutions that provide conventional financing are becoming slightly more risk adverse when it comes to financing the purchase of assets, especially used, quickly depreciating assets – like restaurant equipment. Is this a canary in the coal mine for the economy as a whole? I don’t think we’re there yet, but it’s something worth keeping a close eye on.

Use the assets today…pay me over time…that sounds dangerous!

Truth be told, selling anything without receiving full payment from a Buyer immediately carries more risk. That said, in niche transactions, especially with related parties, Seller financing is common and doesn’t have to result in lost hair and hurt feelings. With the correct disclosures up front and close attention to detail, the transaction can be win-win.

Key items to consider before extending Seller financing.

  1. What is the normal depreciation timeline for the assets being purchased with Seller financing? How easy are the assets to sell on the open market? In the case of used equipment, the third-party resale value might be very low (because unless you’re a restaurateur, the equipment may not have a lot of worth beyond its scrap value).
  2. What is the monthly income of the Buyer? Are they able to make the real estate mortgage payment and the payment on your Seller’s Note for the equipment?

Extra protections to think about.

Rather than just extending a loan backed up by nothing more than a promise on the part of the Buyer to pay, there are a few extra steps you can take to protect your investment:

  1. Security Agreement\Lien: In addition to extending the loan, you can record a lien on the assets being purchased. That way, the assets can be liquidated if the Note isn’t paid, and your loan is recorded in the State database (that savvy Buyers should check before purchasing assets from a stranger!).
  2. Personal Guaranty: Many times, a Buyer will purchase the assets and real estate with their corporation or LLC. Normally, since the Note is in the name of the corporation, you couldn’t seek to collect the Note from the Buyer directly. However, with a personal guaranty, the Buyer is promising individually to cover payments on the Note – and is putting their personal assets on the line. This is great for the Seller, especially since the Buyer’s corporation will be bankrupt (or nearly bankrupt) if they decide to stop paying.
  3. Loan Covenants: Loan covenants are extra promises contained in the Note the Seller signs. These promises can be wide-ranging – such as the requirement that the Buyer provide financial statements on a quarterly basis; that the Buyer get the Seller’s permission prior to entering into certain transactions etc.

Seller financing doesn’t have to be nerve-wracking! If you need assistance, OGS can help!

Leave a Comment

DISCLAIMER: The information provided is for general informational purposes only. Posts and other information may not be updated to account for changes in the law and should not be considered tax or legal advice. None of the articles or posts on this website are intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.