Selling a Business? A Financing Disaster
5 October 2026
Here’s a “selling a business” story that comes straight from one of our recent seeking Office Hours sessions in The Brokers Roundtable℠.
A business owner decides to sell his company. Based on its financial performance, market conditions and the normal multiples for businesses of its type, the company is worth approximately $2 million.
The seller wants $2.75 million.
Eventually, a buyer comes along who agrees to the $2.75 million price—with one important condition: The seller has to finance the purchase.
The seller agrees.
Six months later, the buyer stops making payments.
His reason?
The business isn’t performing the way he expected, and he claims the seller misrepresented certain aspects of the company’s financial condition.
Now the buyer has the business, the seller hasn’t been paid, attorneys are involved and what looked like a successful $2.75 million sale has turned into a disaster.
Unfortunately, much of it was predictable.
Mistake #1: Using Financing to Justify the Price
Seller financing is not inherently bad. In fact, it is often a component of the financing structure of many small and lower middle market business transfers. Properly structured, it can help get a transaction across the finish line.
We offer a comprehensive coaching program – both group and 1:1 options – in The Brokers Roundtable℠, our online support platform tailored for business owners, business brokers, Realtors, buyers and anyone else interested in valuing, buying or selling a business.
And seller financing has value which is why it often costs more than financing through a conventional lender.
But seller financing should not be used to manufacture value that isn’t there.
If a business is realistically worth $2 million and the seller insists on $2.75 million, agreeing to finance the buyer’s purchase doesn’t suddenly make the company worth $2.75 million. It simply changes who is taking the risk.
Instead of a bank or other lender putting its money behind the valuation, the seller is doing it.
There’s also an important warning hidden in the buyer’s offer:
“I’ll pay your price—as long as I don’t have to pay you now.”
Price and terms cannot be evaluated separately.
A $2 million cash offer may be far more valuable than a $2.75 million offer consisting largely of promises to pay sometime in the future.
Mistake #2: The Buyer Skips Due Diligence
The buyer made an equally serious mistake.
Perhaps he was excited about the opportunity. Maybe he believed the seller’s willingness to finance the acquisition demonstrated confidence in the business. So he conducts only superficial due diligence.
This is an invitation to disaster.
If neither the broker involved nor the seller has provided clear justification for the asking price, the buyer MUST verify the financial information to justify what he’s getting ready to pay. Tax returns should be compared with financial statements. Revenue should be examined. Expenses and owner adjustments should be understood. Customer concentration, employee issues, contracts, leases, equipment and working capital requirements all need examination.
Our video, on how the value of a business’ assets might add to the value of a business, is HERE on our YouTube channel.
Due diligence isn’t about assuming the seller is dishonest. It’s about understanding exactly what you’re buying.
The buyer in our example didn’t do that.
Six months later, when results failed to meet expectations, he began examining things he should have investigated before closing.
Then the Payments Stop
Now the seller has a serious problem.
Before the transaction, he owned and controlled the business.
After closing, the buyer owns and controls it, while the seller owns a promissory note.
When payments stop, the seller can’t simply walk into the company, take the keys and resume operations. The buyer alleges financial misrepresentation. The seller insists the financial information was accurate. Attorneys become involved.
Meanwhile, who’s running the business?
Check out our video series on business valuation, “How Much is My Business Worth“ on our YouTube channel.
Customers don’t care about the dispute. Employees still need direction. Suppliers expect payment. Competitors are still competing.
The value of the business will almost certainly deteriorate while buyer and seller fight over who caused the problem.
Even if the seller ultimately has the right to take back the company, he’s unlikely to get back the company he sold.
Key employees may have left. Customers may have disappeared. Vendors may be unpaid. Inventory may have declined. The company’s reputation will certainly have suffered.
The seller can win the legal battle and still lose financially.
How Could This Have Been Avoided?
Start with a defensible valuation.
If the market supports $2 million, price the company accordingly. If the seller believes it’s worth substantially more, there should be objective financial evidence supporting that position.
Second, require meaningful buyer equity.
A buyer who invests substantial personal capital has something significant at risk. That doesn’t guarantee success, but it creates very different incentives than a transaction financed almost entirely by the seller.
Third, insist the buyer perform thorough due diligence.
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Our 14-part series of video shorts, “How to Buy a Business”, is available here.
Interestingly, sellers should want buyers to conduct proper due diligence.
Why?
Because a buyer who thoroughly investigates the business before closing has less opportunity afterward to claim: “You never told me that.”
Disclose the good, the bad and the ugly. Answer questions completely. Document what was provided. Let the buyer and the buyer’s advisors verify the numbers.
If there’s a problem, find it before closing.
The Bottom Line
There was a broker involved in this fiasco. In fact, he is who brought this problem up to us in that particular Office Hours session for advice on how to handle it.
If he had gone through our course, he would have been able to advise his client, the seller, on the downsides of seller financing, the critical nature of requiring buyer cash in the deal and, most significantly, the importance of structuring the representations and warranties section of the purchase agreement to significantly limit any post-closing seller liabilities
At the time the broker brought this problem to us, he had just heard from the seller that no further commission payments would be made!
“Stop chasing the money and start chasing the passion.”
– Tony Hsieh, Zappos founder
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at jo*@*******************og.com
