100% Seller Financing
December 14, 2022
by a searcher in Boston, MA, USA
Looking for advice on how to position 100% seller financing to the seller. I have a deal in play and the price has been lowered but with the upcoming economy challenges I'm thinking of offering his original asking price but without the downpayment they are asking for (granted they meet or stay on track with revenues).
Would like to see how others have submitted an LOI in this capacity or help me to structure the buyout etc.
in New York, NY, USA
1. Motivated seller.
2. *Motivated* seller.
3. Pay asking (good call, nobody else is going to do that).
(Then the finance structure portion)
4. Payment over 10 year amortization schedule.
5. (Depending on seller goals) A ballon payment facilitated by corporate finance x (3-4?) years into the future.
Tips:
Adopt the seller's position explicitly. Let them know you empathize with what they're thinking. See: "accusations audit" from Chris Voss on YouTube.
Help the seller adopt your perspective, especially if it immerses them and bridges *emotional* gaps. (e.g. If they resist and insist on a downpayment, say "But how am I supposed to do that?" and allow them time to think about it. (again see Chris Voss on this.)
Again, make sure the seller is motivated. Can't stress that enough. And help them craft a deal structure which acknowledges your desire for derisking, and whatever their financial goals happen to be.
Also, remind them of the fact that if they get a lump sum up front, they'll have to do something with that money -- they'll have to put it somewhere. So where? in a bank? get ready for sub-inflation interest rates. In the stock market? Get ready for a real beating. Bonds? Sub inflation or high risk or perhaps both. especially given high amounts of corporate debt heading into a deflationary environment. Why not invest in the one business you know best, the business nobody knows better than you, at a solid rate of return? Plus the tax advantages of selling over time if applicable.
from The University of Chicago in Chicago, IL, USA
2) Make sure seller will not have to retire any liability like debt. Otherwise, he will have to come up with cash to sell you the business.
3) If you plan to step up the assets, seller will have depreciation recapture. Tax on recapture is due right away regardless of the payment schedule on seller financing. This may require seller to dig into his/her pocket to sell you the business. I believe this the point by Matt Foreman when he mentions 453 A.
4) Even if Seller has indicated willingness for 100% financing, make sure you have clarity on Working Capital. many sellers (and brokers and other advisors) expect WC is excluded.
5) You risk weak RWI with 100% seller financing.
6) Make sure business does not have to share its financials with customers and/or suppliers. With 100% financing, your balance sheet capital structure could risk such relationships.
7) Many comments have said you should make sure seller is motivated to sell. This is too vague. A seller will not be talking to you (or engage a broker) unless he/she is motivated to sell. Very rarely, a seller and his advisors will ok 100% seller financing unless there is something fundamentally wrong in the business or the family.