In the Midwest, seller financing isn't a nice-to-have—it's expected. If you're selling a business and you refuse to hold a note, you'll eliminate 60-70% of your buyer pool and likely sell for 15-20% less than market value.
If you're buying a business, you need to understand how seller financing works, what terms are standard, and how to negotiate a deal that protects both parties.
Here's everything you need to know.
What Is Seller Financing?
Seller financing (also called owner financing or a seller note) is when the seller acts as the bank. Instead of the buyer paying 100% cash at closing, the seller agrees to be paid over time—typically 3-7 years—with interest.
Example: Business sells for $1M. Buyer pays $700K at closing (via SBA loan or cash), and the seller holds a $300K note at 6% interest over 5 years. The buyer makes monthly payments to the seller until the note is paid off.
Why Seller Financing Is Expected in the Midwest
1. Buyers can't get 100% bank financing. Even with SBA loans, buyers need 10-20% down. Many buyers don't have that much cash, so they need the seller to bridge the gap.
2. Banks require seller skin in the game. Lenders view seller financing as a signal that the seller has confidence in the business. If the seller won't hold a note, banks assume something's wrong.
3. It makes deals happen. Seller financing expands your buyer pool dramatically. Buyers who can't qualify for full bank financing can still buy your business if you're willing to finance part of it.
4. It's cultural. In the Midwest, business sales are relationship-driven. Holding a note signals trust and partnership, not just a transaction.
Market-Standard Terms
Here's what's typical in Nebraska, Iowa, and surrounding states:
Seller note amount: 10-30% of purchase price. On a $1M deal, expect $100K-$300K seller financing.
Term: 3-5 years for operating businesses, 5-7 years if real estate is included.
Interest rate: 5-8%, depending on risk. Higher risk (new buyer, declining business) = higher rate.
Payments: Monthly, with principal and interest amortized over the term.
Collateral: The business itself is collateral. If the buyer defaults, the seller can take the business back (though this is rare).
Subordination: If there's an SBA loan, the seller note is typically subordinated—meaning the bank gets paid first if the business fails.
For Sellers: Why You Should Offer Financing
1. You'll sell faster. Businesses with seller financing sell 30-50% faster than all-cash deals.
2. You'll get a better price. Buyers will pay a premium (5-10% higher) if you offer favorable financing terms.
3. You'll earn interest. A 6% return on your seller note is better than most savings accounts or bonds.
4. You have recourse if things go wrong. If the buyer defaults, you can take the business back. You're not walking away empty-handed.
Seller concern: "What if the buyer runs the business into the ground and I lose my note?"
Reality: Default rates on seller-financed deals are remarkably low (under 5%) when the buyer is properly vetted and adequately capitalized. Buyers who invest their own money and have industry experience almost always succeed.
For Buyers: How to Negotiate Seller Financing
1. Ask early. Don't wait until the LOI stage to bring up seller financing. Address it in your initial conversations so there are no surprises.
2. Offer a higher purchase price in exchange for favorable terms. If a seller is hesitant to finance, sweeten the deal: "I'll pay $1.1M instead of $1M if you'll hold a $250K note at 5% over 5 years." Many sellers will take that trade.
3. Demonstrate you're a safe bet. Share your financial statements, credit score, and industry experience. The more confidence you give the seller, the better the terms you'll negotiate.
4. Be realistic about the amount. Don't ask the seller to finance 50% of the deal. That's excessive and signals you're undercapitalized. Aim for 10-20%.
Structuring the Note: What to Include
A properly structured promissory note should include:
- Principal amount: Total amount owed
- Interest rate: Fixed or variable
- Payment schedule: Monthly payments with amortization table
- Maturity date: When the note must be paid in full
- Collateral: Business assets securing the note
- Default provisions: What happens if the buyer misses payments
- Prepayment clause: Can the buyer pay off the note early without penalty?
- Subordination agreement: If there's a bank loan, how does the seller note rank?
Get an attorney to draft this. A promissory note is a legally binding contract. Don't use a template you found online.
Red Flags to Avoid
For sellers:
- Buyers who want 40-50% seller financing (they're undercapitalized)
- Buyers with no industry experience and no plan for learning the business
- Buyers who won't share financial statements or credit scores
- Buyers who want to defer payments for 6-12 months (huge red flag)
For buyers:
- Sellers who refuse any financing (what are they hiding?)
- Sellers who demand 12%+ interest (unreasonable in this market)
- Sellers who won't agree to subordination (makes SBA financing impossible)
- Sellers who insist on a balloon payment in year 3 (creates refinancing risk)
The Bottom Line
Seller financing is the grease that makes Midwest M&A deals work. For sellers, it's a way to sell faster and for more money. For buyers, it's a way to acquire businesses they couldn't otherwise afford.
Structure it correctly, vet your counterparty, and get everything in writing. Done right, seller financing creates win-win transactions that benefit everyone.