What is Seller Financing?
Seller financing is a financial approach where the seller acts as the lender, assisting the buyer in acquiring the business. It’s a departure from traditional loan methods and involves the buyer borrowing a portion of the purchase price directly from the seller.
Seller financing offers numerous advantages, benefiting both buyers and sellers. It can reduce the buyer’s need for a substantial down payment and make the business more attractive to potential buyers.
As I started researching the world of business acquisitions. I discovered a lot of content and a lot of influencers that were discussing the strategies behind seller finance deals. You hear that instead of going out and raising capital and applying for an SBA loan, that you could have a more frictionless process that would be facilitated between you, the buyer and the seller of the business was attractive.
As with everything in business, we quickly learn that the nuances are sometimes complex, and the financial gymnastics that we sometimes have to go through can make, or break a strategy before we even start and we lose momentum.
Seller Financing Doesn’t Mean You Don’t Have Transaction Cost
There is no such thing as buying a business with NO money out of your pocket. That statement itself is an exaggeration at the very least and a lie at its worst.
I purchased and went through the entire Unconventional Acquisitions platform and I enjoyed it tremendously. Cody Sanchez‘s is great at spreading the word about small business acquisition and she is honest about it being hard. I just don’t think people realize just how hard it is if you’re not determined, because you’ll have difficult obstacles and you’ll need to make hard choices.
Maybe you’re a Roland Frazier fan of the business acquisition world, Who also preaches the gospel of no money down business acquisitions. Roland is good, old school, which I love.
There are other spaces like SMB Twitter, where the content is not about aggressive “no money out of your pocket” “owner financed,” hustles. Instead, it’s more about putting the fundamentals in place for yourself so that you can acquire businesses through more traditional means such as SBA financing, equity investments, and yes, a hybrid of the two combined with some percentage of seller financing or what’s more commonly called a payout structure.
The Buy Then Build Method
Harvard Business School and other influencers in the space like Walker Diebel advocate for the “Buy Then Build” strategy. This is where I’ve landed, and why I’m looking for an acquisition opportunity. I want to buy a business and then build it.
I’ll be the first to tell you, finding a good company is not easy. Finding a shitty company is very easy. Look for a future blog post about my process.
However, you phrase it seller financing, a payout both are essentially talking about the same thing. The owner of the business continues to carry some portion of the financing required to purchase the business.
How this is often done is a percentage of the total financing package, but this is also done sometimes when the seller of the business cannot get the business approved for SBA financing, or a legitimate buyer does not have the financial means to secure financing through more traditional methods I listed.
What sellers have to keep in mind is they want to get their business sold for a fair market price to a credible buyer was intention is to take that business and continue to build on his profitability. You need to know these creative elements of financing are part of the process.They should be open to exploring all avenues of transitioning out of the business they built and starting the next chapter of their lives.
So maybe I was a little hard on the influencers or I should say no money down business acquisition advocates. But there are transaction cost to due diligence and the transaction itself.
Have a Team in Place
You should assemble a team of professional advisors when you’re buying or selling a small business. You gotta have a knowledgeable and trusted CPA by your side, you’re going to need solid legal advice, so lawyers are part of your process. It never hurts to have a good business coach by your side as well. You want to make sure that you’re looking at the entire package the right way so use the team you’ve assembled as part of your success path.
Risks and Challenges to Seller Financing
Every journey has its obstacles. Recognize common mistakes and red flags to steer clear of when selling a Sacramento business. Also, consider exit strategies and long-term profitability.
The idea of acquiring a business without the hassles of raising capital or applying for an SBA loan sounded incredibly appealing. However, as with any business endeavor, the devil is in the details. Some of the risk include:
- Taxation risk
- State and Local Tax (SALT)
- Unidentified liabilities and exposures
- Stocks versus assets
- Capital gains tax
- The time and money spent on the deal
Seller financing can be a game-changer in the realm of business acquisition. However, it demands careful negotiation and thorough planning. Armed with these strategies and knowledge, you can work on your strategy with confidence, unlocking opportunities that may have once seemed out of reach.
