When someone has found a business to buy, he or she frequently has the challenge of meeting the price that was negotiated with the seller. Buyers usually don't bring to escrow a check for the full price, often because the buyer simply doesn't have enough ready funds to cash-out the seller. Or even if there is enough buyer cash, some of it will be needed for working capital. The buyer uses business purchase financing obtains the rest of the money needed to complete a deal.
Buyers and business intermediaries have identified a number of sources for a buyer to obtain business purchase financing. Typically, it takes the form of a loan from a financial institution requiring the buyer to return the money with periodic scheduled payments along with interest. Other sources of financing are private lenders--family members, friends, or investors who make loans for business purchases.
Another form of business purchase financing has the seller agreeing to carry-back part of the purchase price by accepting the buyer's promissory note in lieu of some of the cash needed to meet the agreed-on purchase price. Buyers particularly like this funding strategy. It's reassuring to know the seller believes enough in the business and the buyer's ability to successfully manage it, to agree that part of the price can be paid over time out of the proceeds of the business. Seller financing also increases the chances that the business will succeed under the buyer's management. If the seller is receiving payments for part of the purchase price, he or she will be motivated to make sure the buyer succeeds, so those payments will continue to come in on time. In order to ensure the continued stream of income from the buyer, a seller is likely to intervene to help that buyer if there are problems threatening the future of the business. Another reason buyers like seller financing is that they usually can negotiate for the seller to collect a lower rate of interest than would be charged by a bank or other institutionalized lender, or by a private lender.
Some deals, incidentally, involve business purchase financing through both the seller and another lender. The bank's money, for example, will be used to contribute to the down payment, and the note to the seller will comprise the balance of the purchase price.