August 2011 Seller Financing
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Seller Financing

By Steve Strauss. ARCHIVE:

People often wonder how to get into a business with little or no money. Is it possible? It is, but it isn't easy. One of the best ways to do it is to find an existing business with an owner/seller who would be willing to finance all or part of the purchase. The business itself acts an asset, securing the loan and deal.

People in real estate do this all of the time. Let's say you found a nice duplex that's going for $100,000. Using a 10% loan, it is possible to buy that $100,000 asset with as little as $10,000 down. The bank will loan you 90% of the money you need to buy the property. That's called leverage - the asset itself secures the loan required so that you need not come up with a lot of money out of pocket.

That sort of leverage is similarly possible in the business game.

Indeed, sellers can be sometimes be very willing to finance some of the purchase price. Not surprisingly, this occurs when they are very motivated to sell, for whatever reason. Another reason seller financing is great because sellers may finance as much as 80% of the deal. 100% seller financing is not unheard of either, but very rare, frankly.

The best and most realistic option is to combine bank and seller financing. Let's say you want to buy a restaurant worth $100,000. The bank may be willing to loan you 50%, and the seller may chip in another 35%. All you need now is to come up with another 15% and you have bought the business with very little money down. Where do you find that $15,000?

There are several options:

  • Your own cash. Of course this is optimum. Both sellers and banks will want to see that you have your own skin in the game. If that's not possible, things get tougher, but some other options include
  • Getting a partner with cash. Just make sure you can work well together.
  • Liability financing: Sellers will usually include in the cash price the amount they need to pay off creditors. If you agree to assume those liabilities however, you can reduce your out-of-pocket down payment by that much. Assuming $15,000 in liabilities is not hard to do. But again, this would normally only work with a 100% seller financed deal.
  • Cash flow financing: If the business earns $10,000 a month, offer to pay the $15,000 balance in three payments after closing of $5,000 each, spread out a month apart. For a business that makes $10,000 monthly, that should be easy.
  • Inventory financing: The purchase price will take into account the value of the inventory. If you are short $15,000, ask the owner to liquidate $15,000 in inventory, and then reduce the purchase price by that amount.
  • Asset financing: Arrange, before the sale, to sell one of the business' assets at closing to help finance your purchase: Equipment, patents, trademarks, trucks, office space, etc.
  • Broker financing: Most business sales are done through a broker. To keep a deal, almost any broker would be willing to forgo part of his or her commission and put it in the pot for the seller. My brother sells commercial real estate and it is not uncommon for him to (sadly) kick-back part of his commission to close a deal.

Bottom line: Creative financing is very possible with a seller-financed and owned business.