Templates and Checklists


Seller Financing Agreement Template



Douglas Bean
by Douglas Bean, J.D.

In some cases the buyer of a business may not have all the capital required to pay the full purchase price. One option to solve this problem is called Seller Financing (or Owner Financing). This is a loan the seller makes to the buyer to facilitate the sale.

Here’s an example: If the buyer needs $100,000 to purchase the business, but only has a $40,000 down payment, the seller could elect to "loan" the buyer the remainder of the purchase price.

Typically, this involves two documents: a financing agreement (basically a loan document outlining the details and terms of the loan) and a promissory note. These would normally be executed at the same time the closing documents are signed finalizing the sale of the business.

This arrangement can be very beneficial to both buyer and seller. For the buyer, it gives them access to capital on terms they can more freely negotiate. For the seller (owner), it opens up the pool of prospective buyers to make it easier to sell the business and can result is a better profit on the sale of the business.

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Bundled: Sell Financing Agreement + Secured Promissory Note

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SELLER FINANCING AGREEMENT

With Promissory Note

This AGREEMENT is made on this [Insert date], between [Insert Purchaser/Borrower Name] of [Insert Purchaser/Borrower Address], [Insert Purchaser/Borrower City], [Insert Country/State], [Insert Purchaser/Borrower Postal Code], hereinafter Debtor and [Insert Name of Seller/Financer] of [Insert Seller/Financer Address], [Insert Seller/Financer City], [Insert Country/State] [Insert Seller/Financer Postal Code], hereinafter Secured Party.

The Parties to this Agreement agree to the following:

1. RECITALS

The purpose of this Financing Agreement is to facilitate the purchase of [Insert Name of Business] (hereinafter, "the Business"). The Business is described as follows: [Insert Brief Description of the Business]. For purposes of this Agreement the Business will include all tangible assets, all intangible assets, goodwill, intellectual property, real property, leasehold interests and any other property or asset owned in whole or in part by the Business.

2. CREATION OF SECURITY INTEREST

The Secured Party shall secure the payment and performance of Debtor's obligations under this agreement, including the Promissory Note attached hereto as Exhibit A in the principal amount of $___________ and the payment and performance of all other liabilities and obligations of Debtor to Secured Party of every kind and description, direct or indirect, absolute or contingent, due or to become due now existing or hereafter arising.

In addition, Debtor hereby grants to Secured Party a security interest in the Collateral described below to secure the performance or payment of the Obligations of Debtor to Secured Party under this agreement.

3. COLLATERAL

The Collateral provided under Financing Agreement is as follows:

Real Property: [DESCRIBE ANY REAL PROPERTY SUBJECT TO THIS AGREEMENT]

The Inventory, which includes the stock in trade and merchandise, raw materials, work in progress and finished goods to be sold and purchased under the Purchase Agreement.

All the furniture, fixtures, equipment, and other tangible assets

All the trade, goodwill, intellectual property and other intangible assets

[The leasehold interest owned by the Secured Party for premises on which the business is located, pursuant to a valid assignment of lease]

4. SECURITY INTEREST

Debtor grants to Secured Party a security interest in the Collateral as described above now or hereafter placed used in the operation of [Insert Business Name] or any property upon the premises located at [Insert address where collateral is kept], [City], [Country/State], [Postal Code] or used in connection therewith and in which Debtor now has or hereafter acquires any right and the proceeds wherefrom. Debtor also assigns to Secured Party a security interest in any other rights or interests in which Debtor now has or hereafter acquires.

5. FINANCED AMOUNT

As total consideration for the purchase and sale of the The Business (including its tangible and intangible assets and collateral as described above), the Buyer shall pay to the Seller the sum of $[INSERT AMOUNT BEING FINANCED], and such total consideration to be referred to in this Agreement as the "Financed Amount." The Financed Amount will bear interest at the rate and terms described in the Promissory Note attached hereto as Exhibit A.

6. DOWN PAYMENT

The sum of $[INSERT DOWN PAYMENT AMOUNT] shall be delivered to the Secured Party upon Buyer's execution of this Agreement as a down payment. Subject to the following conditions, the Buyer shall make final payment of the remaining unpaid balanced of the Financed Amount according to the terms of the Promissory Note attached hereto as Exhibit A.

7. ADVICE OF CHANGES

During the lifetime of this agreement, Debtor will promptly advise the Secured Party in writing of any fact which, if existing or known at the date hereof, would have been required to be set forth herein or disclosed pursuant to this Agreement.

8. CONDUCT OF DEBTOR’S BUSINESS

Except as the Secured Party may otherwise consent in writing during the lifetime of this agreement, Debtor will not enter into any transaction, take any action, or fail to take any action which would result in or could reasonably be expected to result in or cause any of the representations and warranties of Debtor contained in this Agreement to be void, invalid, or false.

  1. Inventory: Furthermore, Debtor agrees to maintain inventory levels at or above the following: [Insert description of inventory levels required during the term of the Financing Agreement]
  2. Expenditures: Additionally, the Debtor agrees to limit monthly expenses, unless authorized in writing by the Secured Party, to 3% above the highest monthly expenditures in the twelve preceding months prior to the date of this agreement.
  3. Financing: Debtor further agrees it will not incur debt beyond that contemplated by this Financing Agreement without further written consent from the Secured Party.

9. TAX MATTERS

During this Agreement the Debtor shall timely prepared and file all federal, state, and local tax returns and reports as are and have been required to be filed, and all taxes shown thereon to be due shall be paid in full, including but not limited to sales tax, withholding tax, and all other taxes of every nature.

10. BANKRUPTCY

There is no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or to such Debtor’s knowledge threatened against such Debtor or any affiliate of such Debtor.

11. WARRANTS AND COVENANTS

Debtor hereby warrants and covenants that:

Debtor shall pay to Secured Party the sum or sums evidenced by the promissory note or notes executed pursuant to this Financing Agreement in accordance with the terms of the note or notes. The collateral will not be removed from the Premises other than in the ordinary course of business. Debtor will immediately notify Secured Party in writing of any change in Debtor's address. The Debtor will not sell, dispose, or otherwise transfer the collateral or any interest therein without the prior written consent of Secured Party, and the Debtor shall keep the collateral free from unpaid charges, taxes, and liens. Debtor shall maintain insurance at all times with respect to all collateral against risks of fire, theft, and other such risks and in such amounts as Secured Party may require. The Debtor shall make all repairs, replacements, additions, and improvements necessary to maintain any Collateral in good working order and condition.

12. DEFAULT

The Debtor shall be in default under this Agreement upon any non-compliance with or non-performance of the Debtor's obligations under this Agreement or the Promissory Note attached hereto as Exhibit A. Upon default and at any time thereafter, Secured Party may declare all obligations secured hereby immediately due and payable and shall have the remedies of a Secured Party under the law.

The Debtor also agrees that if a default under this agreement is not cured within 60 days the secured party will have the right to immediately foreclose and take back control of the Business and all its operations.

13. INDEMNIFICATION

Debtor shall indemnify and hold the Secured Party harmless from any and all liabilities and obligations arising from Debtors operation of the business after the Closing. Similarly, the Secured Party shall indemnify and hold Debtor harmless from any and all liabilities and obligations arising from the Secured Party’s operation of the business prior to the Closing.

14. LITIGATION

Debtor warrants there is no action, suit, proceeding, claim or investigation by any person, entity, or governmental entity pending or, to Debtor’s knowledge, threatened against it before any governmental entity that impedes or is likely to impede its ability to perform under this Agreement and to assume the liabilities to be assumed by it under this Agreement.

15. WAIVER

No waiver by Secured Party of any default shall operate as a waiver of any other default or of the same default on a future occasion.

16. NOTICES

Any notices required to be given under this Agreement by either party to the other may be effected by personal delivery in writing or by registered or certified mail, postage prepaid, return receipt requested. A notice shall be deemed communicated as of the time of delivery if personally delivered, or as of the time of mailing. The address of the Debtor for the purpose of receiving notice shall be [Insert Borrower Address], [Insert Borrower City], [Country/State] [Insert Borrower Postal Code]. The address of the Secured Party for this purpose shall be [Insert Lender Address], [Insert Lender City], [Country/State] [Insert Lender Postal Code]. Either party may change its address for the purpose of receiving notice by giving the other party written notice of the change.

17. GOVERNING LAW

This Agreement shall be construed under and in accordance with the laws of _________________ and all obligations of the parties created under this Agreement are performable in _________________.

18. PARTIES BOUND

This Agreement shall be binding on and inure to the benefit of the parties to this Agreement and their respective heirs, executors, administrators, legal representatives, successors and assigns as permitted by this Agreement.

19. LEGAL CONSTRUCTION

In the event, any one or more of the provisions contained in this Agreement shall for any reason be held invalid, illegal, or unenforceable in any respect, that invalidity, illegality, or unenforceability shall not affect any other provision. This Agreement shall be construed as if the invalid, illegal, or unenforceable provision had never been contained in it.

20. PRIOR AGREEMENTS SUPERSEDED

This Agreement constitutes the sole and only agreement of the parties and supersedes any prior understandings or written or oral agreements between the parties respecting the subject matter of this Agreement.

21. AMENDMENTS

This Agreement may be amended by the parties only by a written agreement.

22. ATTORNEYS FEES

If any action at law or in equity is brought to enforce or interpret the provisions of this Agreement, the prevailing party will be entitled to reasonable attorneys' fees in addition to any other relief to which that party may be entitled.

23. SIGNATORIES

This Agreement shall be signed on behalf of [Insert Purchaser/Borrower Company Name] by [Insert Purchaser/Borrower’s name], its [Insert Purchaser/Borrower’s Title], and on behalf of [Insert Lender] by [Insert Lender's Name], its [Insert Lender's Title], and shall be effective as of the date first written above.

[Insert Borrower Name]

________________________________

By [Insert Purchaser/Borrower's Name], its [Insert Purchaser/Borrower’s title]


[Insert Seller/Lender Name]

________________________________

By [Insert Seller/Lender's Name], its [Insert Seller/Lender's Title]


Exhibit A


SECURED PROMISSORY NOTE

$ [AMOUNT] Date: _________________

For value received, the undersigned [Insert borrower name] (the "Borrower"), at [Insert borrower address], [Insert borrower city], [Country/State], [Insert borrower postal code], promises to pay to the order of [Insert lender company name] (the "Lender"), at [Insert lender's address], [Insert lender's city], [Country/State] [Insert lender's postal code] (or at such other place as the Lender may designate in writing), the following:

Promissory Note Amount: $______________

Interest: Interest from [insert start date], on the unpaid principal at the rate of __________% per annum.

1. TERMS OF REPAYMENT

1.1. Payments

The unpaid principal and accrued interest shall be payable in monthly installments of $_____, beginning on [insert date], and continuing until [insert date], (the "Due Date").

Unpaid principal after the Due Date shown below shall accrue interest at a rate of _____% annually until paid.

Payments shall be paid in the amounts and times set forth in the Amortization Schedule attached hereto as Exhibit B.

1.2. Application of Payments

All payments on this Note shall be applied first in payment of accrued interest and any remainder in payment of principal.

1.3. Late Fee

The Borrower promises to pay a late charge of $__________ for each installment that remains unpaid more than _______ day(s) after its Due Date. This late charge shall be paid as liquidated damages in lieu of actual damages, and not as a penalty. Payment of such late charge shall, under no circumstances, be construed to cure any default arising from or relating to such late payment.

1.4. Acceleration of Debt

If any payment obligation under this Note is not paid when due, the remaining unpaid principal balance and any accrued interest shall become due immediately at the option of the Lender.

2. SECURITY

This Note is secured by the property described in paragraph 2, 3, and 4 of the attached Financing Agreement executed on [Insert Date Financing Agreement was executed]

The Lender is not required to rely on the above security instrument and the assets secured therein for the payment of this Note in the case of default, but may proceed directly against the Borrower.

3. PREPAYMENT

The Borrower reserves the right to prepay this Note (in whole or in part) prior to the Due Date with no prepayment penalty. Any such prepayment shall be applied against the installments of principal due under this note in the inverse order of their maturity and shall be accompanied by payment of accrued interest on the amount prepaid to the date of prepayment.

4. COLLECTION COSTS

If any payment obligation under this Note is not paid when due, the Borrower promises to pay all costs of collection, including reasonable attorney fees, whether or not a lawsuit is commenced as part of the collection process.

5. DEFAULT

If any of the following events of default occur, this Note and any other obligations of the Borrower to the Lender, shall become due immediately, without demand or notice:

  1. the failure of the Borrower to pay the principal and any accrued interest when due;
  2. the liquidation, dissolution, incompetency or death of the Borrower;
  3. the filing of bankruptcy proceedings involving the Borrower as a debtor;
  4. the application for the appointment of a receiver for the Borrower;
  5. the making of a general assignment for the benefit of the Borrower's creditors;
  6. the insolvency of the Borrower;
  7. a misrepresentation by the Borrower to the Lender for the purpose of obtaining or extending credit; or
  8. the sale of a material portion of the business or assets of the Borrower.

In addition, the Borrower shall be in default if there is a sale, transfer, assignment, or any other disposition of any assets pledged as security for the payment of this Note, or if there is a default in any security agreement which secures this Note.

6. SEVERABILITY OF PROVISIONS

If any one or more of the provisions of this Note are determined to be unenforceable, in whole or in part, for any reason, the remaining provisions shall remain fully operative.

7. MISCELLANEOUS

All payments of principal and interest on this Note shall be paid in the legal currency of the United States. The Borrower waives presentment for payment, protest, and notice of protest and demand of this Note.

No delay in enforcing any right of the Lender under this Note, or assignment by Lender of this Note, or failure to accelerate the debt evidenced hereby by reason of default in the payment of a monthly installment or the acceptance of a past-due installment shall be construed as a waiver of the right of Lender to thereafter insist upon strict compliance with the terms of this Note without notice being given to Borrower. All rights of the Lender under this Note are cumulative and may be exercised concurrently or consecutively at the Lender's option.

This note may not be amended without the written approval of the holder.

8. GOVERNING LAW

This Note shall be construed in accordance with the laws of the State of _________________.

9. SIGNATURES

This Note shall be signed by [Insert borrower name] and [Insert lender's representative's name], on behalf of [Insert lender company name].

IN WITNESS WHEREOF, this Agreement has been executed and delivered in the manner prescribed by law as of the date first written above.

Signed this _____ day of _______________, _____, at ___________________________,
_________________________ .

Borrower:

[Insert borrower name]

By:____________________________________________________

[Insert borrower name]

Lender:

[Insert lender company name]

By:____________________________________________________

[Insert lender's representative's name]


ASSIGNMENT

[ONLY COMPLETE THE FOLLOWING INFORMATION TO ASSIGN PAYMENTS TO A NEW PARTY.]

For value received, the above Note is assigned and transferred to

____________________________________________, ("Assignee") of

_________________________, _________________________,

(City)(State/province)

________________________.

(Country)

Dated: _________________________

By: ____________________________________________________


Exhibit B

Amortization Schedule

Date

Interest Amount

Principal Amount

Balance

Jan

$0.00

$0.00

$0.00

Feb

$0.00

$0.00

$0.00

Professional Comments

by Douglas Bean, Juris Doctor

Seller financing comes with some unique conditions. For example, sellers may require certain inventory levels, cash on hand, or restrict adding additional debt on the company. The seller may also insist that if payments are missed the seller can step back into the business and start managing the company again.

Here is some information about a few key paragraphs of this document:

  1. CREATION OF SECURITY INTEREST - The business itself is part of the financing agreement in the sense that it is subject to the terms of the agreement. This means that in the event of default the business will be returned to the seller.
  2. COLLATERAL - Collateral is a description of the actual assets being offered to secure the promissory note. Again, these assets are part of the security interest created upon signing this document and are subject to forfeiture in the event there is a default.
  3. CONDUCT OF DEBTOR’S BUSINESS - This is a particularly important paragraph as it outlines the restrictions placed on the business during the term of repayment. For example, a seller could require that a certain amount of cash remain "on hand" in the business to ensure there is enough operating capital to properly run the business. The seller might also require certain inventory levels or that no additional debt is acquired by the company. It’s important to carefully evaluate the terms of this paragraph to make sure that the buyer can reasonably adhere to them.
  4. FINANCED AMOUNT - the financed amount is not the total purchase price for the sale of the business, it is the amount remaining after applying the down payment. This is the amount that must be repaid per the terms of the promissory note. It is also the face value listed on the promissory note. It carries an interest rate and penalties for late, or non-payment.