An item I sold had damage I wasn't aware of, where do I go from here with the buyer?

[marnotom!]

Has the item been shipped and received by the buyer or did you notice the damage shortly after it had sold?

[reallynicestamps]

In either case, contact the buyer and explain the problem.

You can attach photos to an eBay Message.

Then he can ask for a cancellation (which also automatically refunds him) or accept the item as a Good Deal in spite of some cosmetic problems.

[byto253]

If you have it in hand before shipping, point it out with pictures as suggested, and I would offer a discount that you believe is fair with the option for them to cancel if they want to.   If you can do it as a requested cancellation then it keeps your account clean.  Though a single cancellation from a seller's side is not a huge deal. 

[ricarmic]

The only adjustment I would make to byto253s suggestion is to leave the decision about what a fair discount is up to the buyer instead.

This puts the "power" in the buyers hands and in my own experience in the vast majority of times it ends up with a positive resolution with a happy buyer.

There is of course a risk of the buyer picking what we as a seller would consider too large a discount, but in my own experience that is pretty rare. Results may vary by category sold in though!