As banks and lending institutions have tightened their lending practices, more and more prospective buyers have been unable to qualify for business loans. One option is for buyers to secure carry-back financing from the seller, which works as follows: Where a buyer qualifies for a loan that covers only a portion of the purchase price, the seller can accept a promissory note from the buyer for the balance. The seller becomes the junior lien holder behind the lending institution, but gains the advantage of selling the business without waiting for another willing buyer to come along. With the assistance of legal counsel, buyers and sellers can create the financing agreement to appropriately include terms such as interest and payment schedules.
Carry-back financing can be beneficial to both buyers and sellers because it can help to facilitate the transaction. However, there are some risks involved that sellers should be aware of. As junior lien holders, their loan can become unsecured in certain bankruptcy proceedings. Nevertheless, this risk can be minimized by requiring a guarantor, and is many times outweighed by the prospect of quickly selling the business.
