The Abcs of Seller Financing

Insights Legal Affairs The ABCs of seller financing

Protecting yourself when you’re ready to sell

ime to think like a banker. You have lender. Evaluate the risk, structure the deal T built up equity in your business assets wisely, document the financing to manage or paid down the mortgage on your that credit risk, and refuse to provide the investment real estate and decide to sell. loan when the risks are beyond the seller’s You identify a buyer who requests that you risk tolerance. provide some or all of the financing. The seller needs to evaluate the buyer and Should you do it? How can you protect its history as a borrower. If the buyer has a yourself should you agree? poor or no credit history, the buyer should When selling off investment real estate, look for qualified guarantors or the seller major business assets or the business should consider other additional collateral. itself, you want cash at closing. You want The seller should evaluate the buyer’s the buyer to address its financing needs cash flow situation to be comfortable that, through banks, investors or other third collateral and guarantees aside, there will party sources of capital. Occasions do be a reliable source of cash available to arise when the buyer wants or needs seller make payments. financing to proceed with the purchase. Once the evaluation is complete, the sell- “Traditional bank lenders are experts at er must determine its risk tolerance. All underwriting loans, studying the borrower loans entail some level of risk. Collecting Brian J. Moore and its credit worthiness, examining the loans by foreclosures, repossession and Partner, Real Estate Group co-practice collateral, and analyzing the sources of sales and other court action can be very manager repayment,” says Brian Moore, a Roetzel & Roetzel & Andress LPA expensive and uncertain. However, if a sell- Andress LPA partner and Real Estate er declines seller financing, the deal may Group co-practice manager. “Traditional be lost. bank lenders evaluate the risk of the loan; If the buyer is concerned about undis- If the seller decides to proceed, loan doc- a seller considering seller financing should closed claims, it may request seller financ- uments should be drafted by an attorney do the same.” ing to maintain some post-closing leverage experienced in the preparation of loan doc- Smart Business interviewed Moore with the seller. If an undisclosed claim uments for sophisticated lenders. about the differences between seller and against a business is asserted after closing, conventional bank financing and other per- the buyer could set off or take a credit Are there special considerations in cases tinent issues. against monies due the seller. where the seller only provides some of the While each circumstance is different, most financing? When do buyers seek seller financing? times it is a combination of these reasons. If the buyer obtains bank financing in part A buyer may seek seller financing if it How is seller financing different from con- and requests some level of seller financing, cannot qualify for conventional bank ventional bank financing? the seller will need to anticipate the three- financing due to a problematic credit histo- way relationship this creates. In most cases, ry (or lack of one) or when assets being With good legal counsel and a good the bank will insist seller financing be sub- purchased are not suited to conventional accountant, seller financing should not be ordinate to the bank financing liens and lending. Real estate with potential or real any different from a risk assessment and mortgages. The seller must agree that the environmental problems or a restaurant loan documentation perspective. When a bank receives its loan repayment and pro- with collateral or equipment with dubious seller is asked to ‘be the bank’ for the trans- ceeds of collateral in a default scenario collateral value are examples where a bank action, the wise seller will act like a bank. before the seller receives anything. may refuse to lend. A buyer might want the seller to In a default scenario, the seller loses a A buyer may qualify for some conven- approach this on a simpler basis, perceiv- great deal of control. Good legal counsel is tional bank financing, but not the full ing seller financing as easier than conven- an absolute necessity in this situation. amount of the transaction. A bank may tional bank financing. This is a misconcep- lend only $700,000 on a $1 million sale. tion unless the seller is overly eager to Seller financing might be used to defer pay- complete the deal. BRIAN J. MOORE is a partner and co-practice manager of ment on the shortfall. Roetzel & Andress LPA’s Real Estate Group. His practice focuses A buyer may request seller financing to How does a seller successfully act like a on real estate, land use and construction law services, including obtain more favorable loan terms or to bank? conveyancing, development, land use, zoning, eminent domain, avoid providing guaranties or eliminate construction documents and finance. Reach him at (330) 849- loan expenses. Follow the example of a prudent bank 6616 or [email protected].

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