Financing Options for Small Business Sales: How Financing Supports a Successful Transaction

A Challenging Stretch for Small Business Sales

We’ve witnessed a volatile start to the year for both public market and private market participants, leading to a challenging backdrop for completing small business sales. Despite high levels of buyer interest, financing issues are leading to broken deals or the inability for sellers to achieve valuation targets. Anecdotally, we've heard from a number of investors, business owners, and intermediaries who’ve seen promising deals collapse at the finish line due to challenges related to securing financing.

In today’s lending environment banks are more cautious and interest rates remain elevated, which suggests that sellers will benefit from strategizing to make a transaction as accessible as possible. One of the most effective ways to do that? Offering or facilitating buyer financing.

In this post, we’ll explore financing options available to buyers, explain how they work, and show you how incorporating them into your sale process can make your business more attractive and easier to sell.

Why Buyer Financing Matters

While the demand for small businesses remains strong, the path to ownership is more complex than ever. There is no lack of buyers with a desire to transact, but a combination of seller valuation expectations and a high cost of capital create challenges to completing deals (i.e. bank preferred levels of cash flow to principal and interest payments are strained). Sellers who recognize this and provide financing alternatives can dramatically expand their buyer pool.

Offering financing not only makes your business more accessible but can also support a higher sale price, reduce time to close, and signal confidence in the ongoing performance of the business. In other words, financing isn’t just a tool, it creates an advantage for sellers.

Seller Financing: An Attractive Incentive

Seller financing, also known as owner financing, is a loan made by the seller to the buyer to cover a portion of the purchase price. The buyer repays the seller, with interest, over time. This is one of the most common and effective structures for closing deals when buyers face financing hurdles.

How It Works

Depending on the size of the deal, the buyer will bring either personal equity or investor equity to a transaction, which represents the equivalent of a down payment. The remaining portion of the sale price can be financed in part, or in full, by the seller under a formal promissory note. The note includes an interest rate, repayment schedule, and often some form of collateral.

Benefits for Sellers

• Increased Buyer Interest: Buyers are more likely to engage when capital requirements are manageable.

• Possibility of Higher Sale Price: Buyers may be willing to pay more in exchange for flexible terms.

• Ongoing Income: Interest on the loan creates a new revenue stream for the seller.

Risks to Consider

• Default: There's always a chance the buyer fails to make payments.

• Extended Involvement: Seller financing may tie you to the business post-sale.

How to Protect Yourself

• Require a down payment that gives you conviction the counterparty is properly incentivized to usher the business forward.

• Build trust and rapport with the buyer until you grow comfortable with the relationship.

• Use a third-party service to administer loan principal and interest payments.

SBA Loans and Third-Party Lending

Many buyers look to Small Business Administration (SBA) loans to finance a purchase. These government-backed loans reduce the lender's risk, making them a popular option for acquiring existing businesses.

What Makes a Business SBA Loan Friendly?

To qualify for an SBA loan, your business must have:

• Strong and verifiable financials (typically 2+ years of profitable operation).

• Transparent documentation of processes, customers, employees, operations, etc.

• Minimal reliance on the current owner for daily operations.

Why Sellers Should Prepare for SBA Lending

Even if you’re not the one securing the loan, prepping your business for SBA financing makes it more appealing from an acquirer’s perspective. You can go a step further by working with lenders in advance to "pre-qualify" your business, giving buyers confidence and expediting the process.

Earnout Agreements: A Performance-Based Option

Use of earnouts ballooned during late 2023 amidst high interest rates, a condition that can be particularly challenging for acquisition financing. With an earnout, the buyer pays a portion of the purchase price upfront and the remainder over time, contingent on the business meeting performance goals.

Why Use an Earn-Out?

• Reduces the buyer's risk, while allowing the seller to maximize value.

• Aligns the seller’s incentive with future business success.

• Useful when there's disagreement over valuation.

However, earn-outs can lead to complications. Sellers should ensure performance metrics are clearly defined (ex: revenue targets, gross profit, etc) and that legal protections are in place. Earnouts are best used when the seller is comfortable staying involved for a transition period.

Fully Seller Financed Arrangements

Although less common in our experience than other methods, the idea of full seller financing allows a buyer to set a predetermined level of cash they’re willing to pay the seller to take over operations and cash flow, with the right to acquire the business outright at some future date, or over time. This model is best suited for businesses with key-person risk (i.e. the owner wants to step away but can’t due to an integral role played in the business), or for small, asset-heavy businesses (ex: auto shops, manufacturing, retail with real estate, etc.). Here, the buyer reduces upfront risk by avoiding a down payment for the business with an agreement that payments funded by the business's cash flow contribute toward ownership over time. For the seller, this helps accomplish the goal of stable income and a transition out of the operations.

Benefits

• Lower Barrier to Entry: Buyers can get started without full upfront financing.

• Trial Period: Allows both parties to evaluate fit and performance.

• Key Person Risk: Solves for illiquid businesses that depend on the seller

Drawbacks

• Longer Sale Timeline: Full ownership may not occur for years.

• Difficult to Agree on a Cash Terms: Buyers will want to finance the lease with cash flow from the business, meaning sellers have to see value in stepping away from the business over continuing to collect cash from the company

• Ongoing Seller Involvement: You may need to stay engaged in operations or oversight during the lease period.

How to Position Financing to Attract Buyers

Simply having financing options isn’t enough to bring qualified buyers to the table. Sellers need to consider how they’ll market financing options to buyers. A few ideas include:

• If Listing the Business, Highlight Financing: Label the business as “Seller Financing Available” or “SBA-Qualified” in public listing forums.

• Work with Intermediaries Who Understand Financing: Experienced accountants, lawyers, or brokers can help sellers line up financing sources and connect sellers with prospective buyers

• Target Your Outreach: Financing appeals to entrepreneurial buyers, most often individuals, who have a difficult time fitting the profile that lenders seek

The key is to present financing not as a last resort, but as a smart, strategic option that benefits both parties on the path to closing.

Conclusion: Empower Buyers, Close More Deals

In 2025’s challenging credit environment, the availability of buyer financing can make or break a deal. By offering flexible financing options, whether seller financing, SBA readiness, earnouts, or lease-to-own, you’re not just making your business easier to buy, you’re making it easier to sell. 

For sellers, these tools represent more than just ways to close a deal. They’re leverage, differentiation, and a pathway to accomplishing your goals in selling a business.

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