If you’re considering the sale of your existing business, then you know how challenging it can be for buyers who seek traditional financing.  In most transactions today, the seller will need to learn about finance, especially when their business is for sale by owner.  While you may be saving money on commissions paid to a broker, you will also need to learn about seller-assisted financing in a business transaction.  There are several different ways to secure a transaction like this, and it involves a lot more than just a credit check.  Here are some common ways a seller can finance a business for sale by owner.

• Personal guaranty – Perhaps the most common way to secure a business loan, the personal guaranty requires the buyer to give the seller access to his or her personal assets in the event of a default.  While it still requires that the seller goes through a formal foreclosure process, it also gives them access to the buyers other assets in the event that the seller note is not paid.  It also requires a spouse’s signature, which prevents the buyer from transferring assets into a spouse’s name.

• Collateral security – When there is no bank financing involved, the seller may require a form of collateral as security for the loan.  This usually comes in the form of additional mortgages on the buyer’s real or personal property.  However, if the buyer is using a combination of seller and bank financing, the bank will be first in line as a secured creditor.

• Stock pledge – This option, which is increasingly popular for financing a business for sale by owner, requires the buyer to set up a corporation that gives the seller a right to “vote the stock” in the company.  Here, if the buyer defaults on the note, the seller can vote that the payments be made immediately, or that the company management is replaced.

• Life and disability insurance – While not as common as a guaranty, collateral or a stock pledge, many sellers require an additional layer of security.  Here, the buyer maintains a business policy that covers their key management team up to the full amount of the purchase price.  The buyer would normally be the party responsible for carrying such a policy until the loan is paid off.

Planning to finance a business for sale by owner transaction?  Do your homework first and be prepared to request the proper security if you will be offering seller financing.  For more information, read “Is Finance the Key to Success in a Business for Sale by Owner Transaction?”