Seller’s Financing

August 05, 2021

by a searcher in Mackay QLD, Australia

Hi everyone,

I am curious to know if anyone here has experience in acquiring a company/business using seller’s financing? (seller’s earn out).

If so how did the business owner react? was it in a positive or negative towards the idea?

Thank you.

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Reply by a searcher
in New York, NY, USA

There are two major formats of seller financing: an acquisition funded entirely by the seller or an earn-out or partial seller financing through subordinated debt (or preferred equity) where you're mitigating some of the forward earnings risk. In my experience, the fully seller-financed deals are rare; but it's very common for a seller to finance a 15-20% stake. I'm far from an expert here, but I believe the way the interest rates are structured (whether cash pay, PIK, or zero coupon) are negotiable, though the seller would obviously prefer cash pay. The other thing to keep in mind is that if you're tying the forgiveness of the debt to certain earnings metrics, any involvement of an SBA loan can make that difficult and you should consult with your lender on how to structure around it.

Generally I would want seller financing, as it ensures the seller remains vested in the business's success beyond close. Whether that financing is an earn-out or just a seller note will be governed by many factors and largely deal-specific.

Reply by a searcher
in Winston-Salem, NC, USA

If the seller has multiple offers on the table and the only difference is seller financing, they are going to gravitate towards the deals that pay them out right away. The exception would be if you are able to get to a place of great rapport with the seller and they want you to be the one to buy the business, or if the business does not have any other offers - in those cases they have no choice if they really want to sell. Often the asking price is higher than the lendibility price through an SBA bank loan. If you decide you want to "overpay" for the business so to speak, and cover that gap with seller financing make sure you are not putting yourself in a cash poor position from the start. Make sure that inventory and Accounts receivable are included in the buy price and negotiate as far out as possible on the seller financing portion, possibly with a promise to buy out faster if you are able to outperform and grow the business even faster than you hope.

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