Structuring and Financing the Sale of a Business

Structuring the sale of a business means deciding how the purchase price will be paid: how much in cash at closing, how much through outside financing, how much through a note carried by the seller, and which debts are paid off or assumed. The final structure is set in negotiation with the buyer, but sellers should work through the key questions before the business goes to market. For many owners, the business is their largest financial asset, and the structure can matter as much as the price.

Six questions to answer before listing

1. What is the minimum cash you need at closing?

Know the lowest amount of cash you can accept at closing. This number shapes how much financing you can offer and which buyers are realistic for your business.

2. What obligations will you need to pay at closing?

In most sales, the seller pays off its creditors, including any liens on the assets being sold, unless the buyer assumes specific debt, along with a portion of the closing costs. In California, these payoffs are typically handled through escrow. Account for them before deciding what cash you need.

3. Can the buyer assume any existing debt?

If the business carries long-term or secured debt that a buyer could assume, the lender permitting, that can reduce the cash the buyer needs at closing and make the deal easier to finance.

4. What interest rate would you accept on a seller note?

If you plan to carry part of the price, decide what interest rate and repayment period you would consider reasonable. See Why Seller Financing Matters in a Business Sale.

5. Can the business service the debt and still pay the buyer?

This is the most important question. After making payments on any bank loan and seller note, the business must still provide the buyer a reasonable return on their down payment and a living. If it cannot, the deal will be hard to finance and hard to close, regardless of price.

6. What are the tax consequences?

The structure of the sale, including the split between cash and installment payments and the allocation of the price among assets, affects the seller's taxes. Review the options with a CPA or tax attorney before accepting an offer. See Asset Sale or Stock Sale: What the Structure Changes.

Common sources of financing in a business sale

A purchase is usually funded by some combination of:

• The buyer's cash as a down payment
• Bank or SBA-backed loans for qualified buyers and businesses
• A seller note, where the seller receives part of the price over time
• Assumed debt, where the buyer takes over existing obligations

Lenders often have their own requirements for how these pieces fit together, including conditions on any seller note, so the structure needs to be tested against the buyer's financing early.

How a business broker helps

A business broker cannot give legal or tax advice, but brokers see how businesses are actually bought and sold. They bring knowledge of previous sales, current market conditions, and available financing options to help design a structure that works for both buyer and seller and that the business can realistically support.

To talk through structure and financing options for selling a business in Southern California, contact BusinessQuest Brokers.

Frequently asked questions

Who pays off business debts when a business is sold?

In most sales, the seller pays off its creditors, including liens on the assets being sold, along with some closing costs. Secured or long-term debt may be paid off at closing or, in some cases, assumed by the buyer with the lender's approval.

Why does it matter whether the business can service the debt?

Buyers and lenders both need confidence that the business can make its loan payments and still provide the new owner an income. If it cannot, financing becomes difficult and the deal is unlikely to close.

Can a business broker give me tax advice on structuring the sale?

No. A broker can help design a workable structure based on market experience, but tax and legal questions should go to a CPA and attorney.