Security for Seller “Take Back” Financing

One way to increase the chances of selling your business  for the right price is to provide financing of at least a portion of the purchase price paid by your purchaser.  Suppose, for example, you are selling a restaurant business, including real estate, restaurant assets and liquor license.  The purchaser’s bank is only willing to lend 80% of the $1,000,000 purchase price, or $800,000.  The purchaser has $50,000 in cash, leaving a shortfall of $150,000.

As a seller you can offer to finance the $150,000 by taking back a purchase money note from the purchaser.   There are risks which must be considered, however:

  • The purchaser’s bank will want a first lien on the business assets, along with the real estate and the liquor license.  Seller financing typically is subordinate to commercial financing obtained by the purchaser.  However, it may be possible to negotiate a first lien on specific assets, such as the liquor license. 
  • A seller taking back financing should obtain as much security as possible, including a mortgage on the real estate, and UCC liens on the business assets and the liquor license.  Mortgages are recorded in the county where the real estate is situated; UCC liens are filed in Harrisburg with the Department of State.
  • The interest rate charged on the seller financing should reflect the additional risk being taken on by the seller where the financing is secondary to commercial financing.  Sometimes the additional risk of seller financing can also be “built into” a slightly higher purchase price for the business.
  • A seller taking back financing should insist on being named as a “loss payee” on the purchaser’s insurance policy in the event of a casualty loss to the business or its assets.

Give us a call if we can help you “feel more secure” in this area!

– Kevin Palmer


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