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The Seller’s Dilemma

Should you sell using seller financing or continue operating the business? You might not have plans to sell soon. But you could be thinking ahead and maybe you heard a little about seller financing.

Or you could be closer to selling, and are uncomfortable with seller financing. Is it really either or? The third part of the dilemma for the small business is the difficulty a buyer has to obtain bank financing.

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A 2026 Banking Frame Of Mind

As a point of reference, CRE Daily published Underwriting Standards Tighten for 2026 Refinancings. This article discusses refinancing commercial real estate assets. Here are their Key Takeaways:

• 2026 underwriting will be highly selective, focusing on assets with strong cash flow and sponsorship.

• Lenders are recalibrating debt service tests to reflect higher interest rates and stricter assumptions.

• Sponsors able to provide fresh equity have a better chance at refinancing or modifying loans.

• Capex runway and credible business plans are critical for transitional and value-add deals, especially in office.

This last point considers how much time your business has before running out of cash. As funds are used for capital expenditures, that reduces the money available for operations and growth.

So this banker’s mindset makes it more difficult to access bank financing to purchase a small business.

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Business Failure Rates By Year

The graph below is based on data provided by the Bureau Of Labor Statistics [2]. While the graph is titled “Business Failure Rates By Year.” they are really tracking survival rates.

The Bureau Of Labor Statistics keeps track of business openings and business closures to determine survival rates.

You should recognize that business closures include:

• Involuntary Closure: Closing due to financial or legal issues, like bankruptcy or insolvency.

• Failure to Profit: Ceasing operations because it can't cover expenses, even if profitable businesses can fail due to poor cash flow.

• Loss to Creditors/Owners: A closure where owners or investors experience financial loss.

• Cessation of Operations: Simply stopping business, which can sometimes be voluntary (e.g., selling out) but often implies failure.

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When Is The Preferred Time To Sell Your Business?

Thinking about the graph above may help you determine a preferred time to sell your business. After one year a little over 20% of businesses close. After two more years about 40% of businesses have closed. But as time passes the rate at which businesses close slows down noticeably.

If you consider the possibilities it seems like there are three categories. You either will sell in the early years probably sooner than you want to. You may sell in the later years, hopefully profitably, when you feel it’s time to move on. This could happen because of the lack of a successor.

Or you could sell somewhere in the middle when new challenges and opportunities arise. One of the keys is to be prepared in advance no matter when you sell. For a lot of business owners that is not the typical approach. Are You Prepared To Sell Your Business? will help you prepare.

To add more credibility to this last point, Morgan & Westfield is an M&A firm specializing in selling companies up to $100 million in revenues. On their podcast M&A Talk they have interviewed over a dozen entrepreneurs who have sold their business. “Nearly every business owner said they grossly underestimated how difficult the process would be. Why? The majority cited a failure to prepare.”

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Ongoing Risks Of Operating A Business

Continuing to run a business instead of selling, means you remain exposed to the day-to-day challenges and inherent uncertainties of business ownership. You undoubtedly recognize these risks:

• Operational & Market Risks: You retain responsibility for all internal operations, including process efficiency, managing employees, systems maintenance, regulatory compliance, and responding to competition and market changes.

• Financial Stress: You bear the ongoing financial risks, such as managing cash flow, dealing with potential economic downturns, and ensuring long-term profitability.

• Personal Commitment: Operating the business requires a continuous personal commitment of time and effort, with risks of burnout and potential negative impacts on work-life balance.

• Unlimited Liability: Depending on your business structure, you may face increased personal liability for business debts and legal issues.

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Bank Of America Business Owner Report

Bank Of America (BOFA) is the biggest small-business lender in the U.S., according to the FDIC. They produce an annual survey in the fourth quarter capturing business viewpoints about recent trends and the year ahead. They survey small and mid-sized business owners across the U.S.

Here are some highlights from the BOFA 2025 Business Owner Report:

• 74% of business owners believe their revenue will increase in the next 12 months.

• 59% of business owners plan on expanding their businesses.

• 88% of business owners currently say they are being impacted by inflation.

• 67% say they are currently being impacted by labor shortages.

• 40/% are raising wages to attract more talent.

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Should You Use Seller Financing To Sell Your Business?

I believe that the first consideration is that you need to prepare to sell your business far in advance. The first roadblock might be that you don’t feel like preparing far in advance. You also might prefer to receive all cash for your business instead of providing seller financing. Unless you read articles like this one and others, you won’t be convinced. And you won’t be properly prepared to sell your business when the time comes.

Sufficient advance preparation will put you in a much better position to maximize the sale of your business. You will have more and better options. And taking into account some of the data provided above, you should recognize that the time to sell your business may come sooner rather than later.

Much other information that you find about selling your business will not point out that the promissory note created through seller financing is an asset that can be sold. By taking the time to understand this concept in advance, you will open your mind to an expanded outlook about selling your business.

Before considering more details about seller financing, I hope that you see the benefit of keeping the insights above at your disposal. You may realize that you would prefer to do something else instead of running your current business, before you expect to.

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Seller Financing Considerations

If seller financing is new to you, the basic idea is that you will receive part of the sales price of your business in periodic payments, direct to you from the buyer. You will not loan money directly to the buyer, even though the process is often referred to as a loan.

Whether seller financing is new to you or not, there’s always another creative way to structure the sale of businesses, real property and personal property. The process is often referred to as creative financing.

Here are a group of articles to help you better understand and to utilize seller financing:

• Seller Finance Your Business In 2026

• The Pros And Cons Of Seller Financing - Part 1

• 16 Ideas To Help You Utilize Seller Financing

• What Are The Tax Implications of Seller Financing?

Example: If you sold a business for $500,000 at 8% interest with 25% down for a 6 year term, you would receive 72 monthly payments of $6,574.97.

That’s $473.397.50 from the payments + $125,000 down payment = $598,397.50

Here are some of the other possibilities for this example:

• A higher or lower interest rate as agreed upon by seller and buyer without needing a bank’s approval.

• A larger or smaller down payment. While a larger down payment is good advice, a higher sales price and interest rate could be more affordable for the buyer. This change in the terms would also produce a larger monthly payment. Such an arrangement could work as long as the cash flow from the business supports the payments.

• Monthly payments are common but not required for seller financing. Even with monthly payments, the payment schedule could be adjusted based on needs. For example, payments could start after an initial period of no payments at the beginning of the note. For a seasonal business, payments could be reduced during part of the year. And of course stepped payments as explained in this article offer a great alternative.

• A balloon payment could be used. This could allow a longer payment term to be amortized which would reduce the amount of the periodic payments. The seller should look ahead and feel enough confidence that the buyer will be able to make the balloon payment. This could involve a refinance provided by a bank, for example.

  Even if the buyer has difficulty paying the balloon when it is due, seller financing offers more flexibility in this situation. The buyer and seller could agree to modify the note, and this could include a favorable inducement. For example, a one percent increase in the interest rate could be applied to extend the term of the note.

• If real estate is also being sold in addition to the business, it is a good idea to create a separate real estate note. This opportunity allows for a similar list of seller financing possibilities as for the business note.

  Using your imagination will help you further utilize seller financing. Perhaps the buyer has a boat or a motor home that could be used as the down payment. Or a bank mortgage could be secured as the first lien, and the seller could hold a second mortgage.

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What About Seller Financing Risks?

The most significant risk the seller faces is that the buyer defaults on the loan payments. This can result in lost income and potentially force the seller to repossess a business that may be in worse shape than when it was sold.

If this were to happen we don’t know the time frame. How much time elapses from the sale of the business to the default?

And the seller doesn’t know what would have happened in the same time frame if they were still running the business. Without this line of thinking, it’s easy for a list of seller financing risks to sound like problems will happen just because of seller financing.

Likewise if this process would lead to legal and financial headaches the same comparison applies.

Another concern about using seller financing to sell your business is that some of your capital remains tied to the business for the term of the loan. But you should have received a down payment, and should be receiving ongoing payments at a favorable interest rate.

Further you are receiving the tax benefits of an installment sale.

There is also much time gained to utilize for other opportunities.

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What Does The Typical Small Business Owner Do After Selling Their Business?

• Accoring to the 2023 National State Of Owner Readiness Report from the Exit Planning Institute,[3] an estimated 73% of privately held companies in the U.S. plan to transition ownership within the next decade. A 2026 Raymond James survey [4] has escalated this estimate stating “88% plan to financially exit their business, either partially or fully, within the next decade.”

• The Exit Planning Institute report indicated that 39% of business owners plan to invest in another business after selling their current business. Per Raymond James, "one-third will continue working at their current business while 30% intend to invest in or acquire a new one.”

• 54% of owners believe ensuring their business remains profitable is key to a successful exit.[3]

• Even after transitioning some or all of their financial stake, one-third will continue working at their current business, often as consultants or board members.[4]

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Conclusion

Whether you continue to run your business, or sell it using seller financing, there is risk either way. The evidence urges you to be prepared to sell ahead of time. It seems like it’s best to at least have the mindset that you should be prepared to sell before you want to.

Recognizing the likelihood of providing some seller financing when you do sell your business, why not learn how to make it most advantageous?

Learning more about structuring the promissory note used to provide seller financing will improve your financial outcome. Knowing the possibilities of selling the note or a partial sale, will also enhance your outcome after selling your business.

The data also indicates that after selling your business, there is a good chance that you will remain involved in business one way or another. Purchasing another business or franchise and/or real estate are all avenues where seller financing has advantages.

Good luck at making successful transactions while running your business, and at the time you decide to sell.

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Have You Considered Selling A Note?

If you have a note for sale, get started now. Please submit a worksheet, and I will start working to produce a deal for you.

As a note broker I will work with you to give you the best value for your note. This involves a more in depth analysis of your needs, your note and the best funding sources to approach on your behalf. This also includes presenting your situation to note buyers in the most favorable way. And my approach will not be limited by any one note buyer's requirements and note pricing. So TAKE ACTION NOW!

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Related Questions

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