Restaurant for sale opportunities in 2023 face an uphill battle when it comes to lending. Many banks are requesting or requiring that partial seller financing be part of the ultimate lending package. What does that mean for the restaurant seller?

Seller financing or owner financing occurs when the business owner receives any portion of his payment over time, in the form of a promissory note, rather than being paid in full at closing. The amount ranges from small (usually ten percent) to large (as much as 80%). The terms are as individual and unique as the business itself and can be for any amount of time and interest rates the parties can agree to.

However, there are two typical arrangements for owner financing. The first situation occurs when a bank is lending through their SBA loan program. In this scenario, a restaurant for sale priced at $350,000 may have a 10% down payment provided by the buyer, a 10% note financed by the seller with the balance of 80% comprised of bank lending.

This is very typical in today’s high interest rate market where a lender is looking for extra “coverage” for their risk in the deal. For both the buyer and seller, it is a good scenario. It represents a minimum amount of risk for the seller and improves the lending position of the buyer substantially. The lender counts the seller note in this scenario as part of the equity the buyer is bringing to the table. In high interest rate environments, a ten percent seller note can be the difference in a deal passing the threshold for SBA lending.

In the second common scenario, without any bank lending, the seller takes a larger position on the seller note. This is frequently 50% down and 50% financed. Sometimes these payments are amortized (or calculated) based on a ten year term with a large balloon payment at the end of a five year note. The benefits to this type of lending for a buyer is a usually a better interest rate and lower fees than those associated with lending.

In either scenario, an attorney should prepare a promissory note, the legal instrument that lays out the full terms of any financing and detailing the collection opportunity for the seller if the note should not be paid.

Pros and Cons of Financing Your Restaurant for Sale

More buyers: If your restaurant for sale is to attract the most buyers, seller financing can be a powerful tool. It makes the restaurant more attractive to a more potential buyers, particularly those who might not qualify for traditional bank financing. The business may not qualify for an SBA loan, because it has not been in business long enough or the books and records are not strong enough. In these cases, owner financing is a favorable alternative to the buyer.

Higher selling price: Because you would be assuming some risk by providing financing, you can often justify a higher sale price for your restaurant. Moreover, your willingness to provide financing can be seen as added value.

Generate income: The seller earns interest on the loan, which can provide a steady income stream for a period of time after the sale.

Potential tax benefits: Depending on the seller's tax situation, spreading the income from the sale over several years can possibly lead to a lower overall tax liability compared to receiving the entire sale proceeds at once.

Risk: The main downside of seller financing from the seller's perspective is the risk of the buyer defaulting on the loan. If the buyer can't make their payments, the seller will have to go through the process of reclaiming the business, which can be complex, time-consuming, and expensive. The business might also suffer during this period of uncertainty, losing value and potentially leading to a loss for the seller. However, this risk underscores the importance for the seller to thoroughly vet potential buyers not only for their ability to run the business successfully but also for their financial reliability.

Pros and Cons for Buyers Using Owner Financing on a Restaurant for Sale

Buyers taking advantage of seller financing experience some benefits and some drawbacks. Here are the most common ones.

Easier financing: Traditional lenders have stringent requirements regarding credit scores, collateral, and business experience. For potential buyers who lack these, especially first-time business owners, meeting these requirements can be a significant hurdle. Seller financing reduces these barriers as the seller may be more willing to consider the buyer's potential and passion for the business, thus enabling buyers who might not typically qualify for a loan to make the purchase.

Flexible terms: The terms of a seller-financed deal are often more flexible than those of a traditional bank loan, as they are negotiable between the buyer and seller.

Faster closing process: Without the need for bank approval, the deal can often close much faster. The buyer and seller negotiate the terms with need for any third-party approval processes.

Established business: When buying an existing restaurant, there's the advantage of purchasing a business that already has a customer base, menu, staff, etc. This reduces startup time and associated risks.

Higher overall cost: Since the seller is assuming more risk than a traditional lender, they may charge you a higher interest rate, leading to a higher overall cost for the restaurant.

Down Payment: While access to financing may come quicker through owner financing, consider also that the down payment may be higher than a traditional loan would require. This is because the seller is agreeing to take on more risk for the deal, and a stronger down payment helps minimize their risk in the deal.

In conclusion, both buyers and sellers can benefit from seller financing, but the process can hold risks for both parties. For sellers, this option increases the buyer pool, may raise the selling price but includes more risk.  For buyers, they may need to come up with a higher down payment but will have a faster closing process, less paperwork and fewer fees.

If you want more information on financing a restaurant for sale, download our free e-book on financing a restaurant purchase.

Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE, is the co-founder of We Sell Restaurants, a brand that has carved an unparalleled niche in the industry as the nation's leading and only business broker franchise focused on restaurants. Under Robin’s leadership, We Sell Restaurants has grown to 45 states where it dominates the restaurant for sale marketplace, including franchise resales, delivering on the founder’s vision to Sell More Restaurants Than Anyone Else. We Sell Restaurants was named one of the most influential suppliers and vendors in the country by Nation’s Restaurant News and has earned a position on INC 5000’s list of fastest growing privately held companies. Franchisees of We Sell Restaurants surveyed by Franchise Business Review placed it 25th in the nation in franchisee satisfaction.

Robin is the Chair of the Women’s Franchise Committee of IFA and is a member of the IFA Board of Directors. She is also an MBA and Certified Franchise Executive (CFE) and has her CBI (Certified Business Intermediary) designation from the International Business Brokers Association. She co-authored Appetite for Acquisition, a small business book award winner in 2012 and contributes frequently to industry press appearing in Forbes, QSR, Modern Restaurant Management, Franchise Update, and others. She has appeared on The TODAY Show as a restaurant expert and Entrepreneur Magazine has named her to their list of the “Top Influential Women in Franchising.”