Seller financing benefits both sides

By Scott Bushkie / Guest Column

If you’re considering selling your business, don’t expect to walk away with all cash at close. This isn’t like selling a house. Most deals involve some sort of alternative financing. You may be asked to accept an earn out, roll over a portion of equity or (most commonly) provide seller financing.

Even when the M&A market is strong and lenders are aggressively financing business acquisitions, seller financing is often still part of the deal structure. And when there’s a downturn or lenders tighten up, seller financing becomes even more important.

Seller financing is the bridge between a buyer’s immediate resources and the value they see in your business. Essentially it’s a loan from the seller, and the agreement is typically structured with monthly payments over a three to five-year period.

Most of the deals we see have something between 10-30 percent in alternative financing by the seller. The larger the risk (e.g. customer concentration, the owner “is” the business, a lack of management), the more seller financing a buyer will request. But seller financing doesn’t just work in the buyer’s favor. Here are four ways it can also benefit the seller:

Buyer confidence. Buyers are more comfortable when you’re willing to keep a little skin in the game. A seller who’s willing to bet on a buyer’s success will often be rewarded with a higher business value.

On the other hand, a seller who demands all cash at close may be subject to extra scrutiny during due diligence. I guarantee someone on the buyer’s advisory team is asking, “What does the seller know that we don’t?”

My firm recently had a buy-side client who agreed to a $6 million purchase with all cash at close. The buyer was confident he was getting a good deal and could do something with the business. But during due diligence, we found the seller’s backlog had dried up and he had very little visibility into future sales. EBITDA was dropping from $1.5 million to $1 million or less.

The buyer was willing to honor his original purchase price, provided the seller was willing to take a portion as a contingency payment, tied to future sales. The seller very boldly said no. He wanted all cash at close or no deal. He got the latter.

Flexibility. The more flexible you can be with the deal structure, the wider your buyer pool. Your best buyer may not be a good fit for full conventional lending, but they may have the experience and drive to grow your business.

Taxes. Depending on how the deal is structured, an all-cash-at-close arrangement could push you into a higher tax bracket. Spreading out your payments over time can potentially lower your tax liability and put more money in your pocket at the end of the day.

Interest rates. You can set your own interest rate strategy. Offering rates below market can make your company more attractive. Alternately, most of my clients offer rates slightly above the bank’s. You might be able to charge 6, 7 or even 8 percent interest and generate additional income from the buyer.

As with any business transaction, there are risks. With seller financing, your loan will sit behind the lender’s. So you also need a measure of confidence that the buyer will fulfill their commitments.

If you’re working with a company or private equity firm looking to grow through acquisition, make sure to do your own due diligence with your team. This could include things such as credit checks and/or a letter from their lender or accountant speaking to their financial strength. One of the best tactics I have seen is to get a list of previous businesses acquired and ask to talk to the past business owner(s). If it was a positive experience, they will have little to no issues. If they are hiding something, most times they will be more defensive or apprehensive.

You need your own level of confidence in the buyer. You want to know they’re financially sound, ethical and likely to make your business a continued success. Yes, there are horror stories out there about sellers getting bilked or having to take back a failing business after a buyer ran it into the ground, but bad news travels faster than good. In the vast majority of the deals we’ve done, the sellers got paid.

Scott Bushkie is the founder of Cornerstone Business Services, a national M&A firm with offices in Wisconsin and Iowa that specializes in the lower/middle market sale of privately held and family-owned businesses. He is a fellow and past chairman of the International Business Brokers Association (IBBA) and a Certified Business Intermediary (CBI).