May 31, 2020  
 
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Business Acquisition Financing

 

Buying a Business With Financing From the Seller

Like it or not, selling business owners have become de facto lenders. Seller financing is becoming more commonplace – we'll teach you about the nuances that are involved with asking a business seller to finance a business purchase.

Financing a business isn't easy anymore. Facing increased regulatory scrutiny, lenders have clamped down on the types of businesses they finance and the amount of money they lend.

Aspiring entrepreneurs who lack substantial investment capital often find themselves out of luck – at least when it comes to financing an acquisition through a traditional lender.

At the same time, business sellers are finding it harder to offload their businesses. A down economy and tighter lending criteria has translated into fewer buyers in the marketplace. Even business owners who have spent years preparing for a sale are discovering that selling a healthy business in today's economic climate is a lot harder than they thought it would be.

The combination of commercial lending restrictions and a competitive business-for-sale marketplace should make seller-financed business acquisitions more popular than ever. Yet many sellers are still hesitant to finance the sale of their companies. As a buyer, you can make it easier for the seller to agree to a seller-financed deal. Here's how . . .

  • Seller financed portion. It's not reasonable to expect the seller to finance the entire purchase price. A 100% seller-financed transaction puts all the risk on the seller – and that's a risk any intelligent seller isn't willing to take. Buyers should be prepared to make a significant down payment, usually consisting of the difference between the value of the assets and the total value of the company.
  • Business expertise. If you don't have any experience in the industry, you're going to be hard-pressed to convince a seller to finance the sale. Successful seller financing is predicated on the assumption that the business will prosper enough to cover the principal and interest payments, and the more experience you have the easier it will be for the seller to justify financing the sale.
  • Net worth considerations. Any commercial lender worth their salt requires borrowers to demonstrate net worth that is capable of absorbing losses should the business fail to perform at anticipated levels. Sellers are no different. If you can show sellers that you have enough net worth to cover the down payment and contingencies, the chance of a seller-financed transaction improves dramatically.
  • Investment risk. It's much easier for a seller to justify financing a business in a growth industry than it is to justify financing a business industry that is trending downward. The overall risk associated with the business is an important factor to consider when approaching the seller about financing.

Related Articles

Want to learn more about this topic? If so, you will enjoy these articles:

Financing Small Business Acquisitions: Debt Service Coverage Ratios
Using Stock To Buy a Business
Sources of Business Acquisition Financing


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