100% Seller Financing - Structuring Levers?

searcher profile

September 12, 2024

by a searcher from Indiana University, Bloomington/Indianapolis - Kelley School of Business in New York, NY, USA

For those who have looked at 100% or nearly 100% seller financing, how have you structured the legal mechanics and what are the levers you used to get the seller comfortable with the structure?

What happened if you didn't pay the note - was it secured by the equity? i.e. if you didn't make note payments, seller could take the "keys" / company back?

Did you offer a PG or limited PG on the seller note? Was the note secured by the assets?

I am looking at a deal with 100% seller financing and haven't used this structure in the past. The sellers are uncomfortable with the structure and I'm trying to figure out what/where I can give in order to get them more comfortable. Typically there's a reason or multiple reasons the business can't transact with meaningful cash upfront and/or a bank lender, so it's not without risk, but looking to see what others have done to structure these type of 100% seller financed deals.

Thanks for any and all feedback.

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commentor profile
Reply by a professional
from University of Michigan in Detroit, MI, USA
Hi Anon, 100% seller financing is rare, but it does happen. Normally, as you suggest, the business is distressed. This works to your advantage--do the sellers have any other option? If they want to sell, do they have to loan 100% of the purchase price? If so, use that to your advantage and try to avoid a PG at all costs--that sounds like a lot of risk on your end.

Is the business asset heavy? In other words, if you default, will sellers get meaningful value from an interest secured against the assets? If so, offering them that sounds reasonable. And yes, you can pledge the equity of the business. But if you default, I imagine handing the keys back to the sellers won't be that much of a benefit.

Finally, how aggressive can you be at paying back the note? You could agree to an aggressive timeline, with a payment holiday if the performance of the business dips. That way, you're promising to return them the money as soon as possible while also giving you some wiggle room in the even that something goes wrong.

Just some thoughts. Let me know if you want to discuss further. DM me here or reach out at redacted
commentor profile
Reply by a professional
from York University in Toronto, ON, Canada
It's popular to talk about online but I've yet to see a deal successfully close with ~100% seller financing. That said, if I was you and trying to get the deal done, I'd offer the assets and equity as security for the note. You're not pledging the assets or equity to a bank so there's no downside for you.

I might offer a limited PG but not a full one. If they're getting the assets/equity back on a default, it doesn't make sense to me while they would also get full value on the note.

Hope that's helpful
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