How to Buy a Business With Seller Financing

Advertising and publishing veteran Janelle Regotti was looking for a business to buy. The right opportunity presented itself last year when she found Guide Publishing, a company that distributes a quarterly resource guide for Northeast Ohio seniors. The only catch: Regotti didn’t have the $500,000 asking price. 

With few physical assets to borrow against, she was unlikely to get a bank loan. So with the help of her business broker, she negotiated a seller-financing deal and bought the business five months later with just 10 percent down and quarterly payments due over 10 years at about 6 percent interest. 

Of course, most sellers won’t finance 90 percent of their asking price. But borrowing 10, 20 or even 30 percent from a seller at a competitive rate still beats using your credit card to cover capital shortfalls. If you’re interested in seller financing, here’s what you need to know.

When it makes sense.

Being short on cash isn’t the only reason to push for seller financing. These loans also can bridge the gap if you and the owner can’t agree on price. 

Renzo Aida, who bought a dance studio near Boston in 2013, will attest to that. He had the money to pay the six-figure asking price in full but thought the seller wanted 20 percent too much. 

“I wanted him to put his money where his mouth was,” Aida says. Both parties went into negotiations and eventually got what they wanted. Aida has since increased revenue by 28 percent.

What sellers expect.

Besides cashing out, sellers want assurances that their baby will be in good hands. They want a buyer who is experienced in the industry, with a solid business plan, working capital and roots in the community, says William White, regional director of Murphy Business & Financial Corporation, a national business brokerage firm. Sellers treat these loans as seriously as any bank would, says White, who lives in Hudson, Ohio. This means requiring a credit check, collateral (business assets and possibly your home) and life insurance. Loan terms often extend up to 10 years, interest rates are comparable with those offered by banks, and it’s typical for sellers to stick around for 60 to 90 days post-sale to advise the buyers.

How to vet the deal.

It’s not enough to grill the owner on the intricacies of their business. You have to scour the financials, from bank statements and cash flow to tax returns and P&L reports. You also have to inspect the physical property to ensure all inventory, equipment and other assets are accounted for and in working order. “Other-wise, you don’t  now what you’re getting,” Regotti warns.

Trusting the seller is imperative. “Make sure it’s someone you actually want to be in business with after the sale is complete,” says Regotti, who negotiated a six-month transition period during which the seller played consultant. Another must: having a business attorney in your corner, even if you’re working with a broker. “I had my attorney look over everything,” she adds. 

What to negotiate.

Owners may not openly advertise their willingness to partially finance a sale—but, according to White, it’s common for them to consider lending at least 5 to 15 percent of the purchase price. 

KC Truby of Tucson, Ariz., who bought six owner-financed businesses over the past five decades, suggests agreeing to the asking price but getting creative on the terms. Regotti, for example, nabbed 90 percent seller financing by promising to apply for an SBA loan two years down the line. If she gets it, she’ll pay off the seller in full. Other buyers can bridge valuation disagreements with an earn-out clause that grants the seller extra pay during a set period if profits meet or surpass expectations. 

“You can dream up 100 different ways to do this,” Truby explains. “It really boils down to what the owner wants to accomplish.”