How to convince sellers to pay for their own acquisition

My favorite way to finance a deal?

Seller financing.

This is where the seller funds some (or all) of the business’s purchase price, “becoming the bank” and taking on the risk of the transaction.

Unsurprisingly, this type of deal is also one of the hardest to find.

Which begs the question...

Why would a business owner be open to seller financing?

There are three main reasons:

1. Selling a business is a big tax event

The seller pays a lot less in capital gains tax if they help finance the deal.

If they’re selling for $1 million, and chip in $100k of their own money, the buyer will then pay that $100k back over five years, plus interest.

So the seller ultimately pays less in taxes on that $100k, and makes more than $1 million because of interest.

Not every seller is aware of this, so you can point this out in negotiations.

2. The bank might valuate their business lower than they were hoping to sell for

So, the bank wouldn’t provide 100% of the financing.

But if the seller can fund 10% to 20% of the price themselves, then the deal could possibly still go forward.

3. If the seller’s made a lot of money over the years, they might prefer an income stream over an immediate payment

This is another big point of leverage for negotiation.

Let’s say they receive 80% of the purchase price up front.

For the remaining 20%, you could tell them:

“Look, you’re retired. Do you want some income to live off of? I’ll pay you for the next five years, and you’ll make $5,000 every month off the seller finance payments.”

So, they’d see it as an income stream that they’re also earning interest on.

Now, let’s talk about it from the buyer’s perspective.

Seller financing is beneficial for the buyer for two reasons:

1. It keeps the seller engaged

If you’re paying them $100,000 over five years, they’re going to do their best to help you out and make sure the business stays profitable.

Because if you make money, they make money!

2. Under SBA guidelines, your seller note can qualify as an equity injection by the buyer

(As long as it’s on full standby for two years or more.)

That means the seller’s payment can actually count as some of your equity.

Say you have a 10% seller note on that $1 million on full standby for two years...

Then the bank may only require you to put 5%, or 0%, of your own money down!

For all these reasons, I always tell my students to aim for seller financing deals whenever possible.

If you’d like step-by-step guidance on how you can find and structure these kinds of acquisitions for yourself...

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More to come in the next Acquisition Ace newsletter!