In our opinion, at the Institute for Business Acquisitions, seller financing should be an essential part of almost every company acquisition.
What is seller financing? Quite simply, it is getting the current business owner (seller) to finance all or a portion of the amount that you need to acquire the business…. meaning the buyer will be making payments to the seller for a period of time for some portion of the acquisition price.
Why do we like seller financing so much?
1) It leaves the seller “on the hook” to some degree regarding the integrity of the business itself (the financials, customers… etc.)
2) It increases the seller’s motivation to provide proper training and transition of ownership to you, because he or she has a more vested interest in your success.
3) It decreases the amount of cash and/or bank financing that you need to come up with to make the acquisition happen.
Those reasons make it very attractive to us as buyers, but as you may expect, it’s not always attractive to the seller. They almost always prefer an all cash deal, and will likely be resistant and skeptical of any financing deal.
So how do we overcome this? Here are our 3 tips for giving you the best chance at maximizing seller financing on your deal.
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1) Credit Score
I’ll start with the easiest one…. your credit score. If you are going to ask the seller to float you for a significant amount of money, they are going to want to know how credit worthy you are. If your credit is good, and I would consider 700 or above “good”, print out your report and showcase it with your offer. Use this as a statement of “security” to the seller. Point out that you have a history of paying all of your debt, and you take it very seriously.
If you have problems with your credit, do what you can to get it cleaned up. Short of getting it cleaned up, have documentation ready to explain any issues pro-actively. The seller is likely going to see them regardless, so it will be a good gesture to get it on the table early and explain it.
All that being said, if your credit is very bad and you have no reasonable justification for it, don’t expect the seller to give you much of a break. Expect lower seller financing amounts, higher interest, and most likely a higher degree of oversight into your operations.
2) Be Reasonable
We want you to get the best seller financing deal possible, but it’s important to have proper expectations and be reasonable. Yes, we have personally pulled off 100% seller financing deals, so we’re not saying that you shouldn’t go for it if you think it is possible, but regardless, you need to be reasonable.
Here are a few examples:
a) As mentioned above, if your credit is terrible, don’t expect a lot of seller financing, and don’t expect a low interest rate. It’s probably not going to happen.
b) Offer to pay the seller an interest rate above what you would be paying the bank. Common bank loan rates today for acquisitions are around 6%, so don’t be afraid to offer the seller 7% or more. I wouldn’t go too crazy here unless you have no other financing options, but at the same time you want to make it attractive for the seller. Remember, they likely wanted all cash to begin with.
c) Don’t stretch the seller out too far. We usually offer to have the seller paid back in 3-5 years, depending on our cash flow projections.
d) Offer and expect the seller to want to have reasonable access to your operations and financials during the term of seller financing. Remember, the seller isn’t a “bank”. They probably aren’t in the business of giving out loans, so if they want to see what you’re doing somewhat regularly to make sure their loan is still safe, you should be fine with that. That doesn’t mean that they can hover over you all day. I suggest asking up front what access the seller would like, and then setting up a structured and regular meeting to address it. That way the expectation is set, and there shouldn’t be any surprises.
This is the big one…. build a relationship with the seller. If this person is going to finance you, he or she is absolutely going to have to like you and trust you.
Here are a few ways to get this done:
a) Sell yourself. This doesn’t mean that you should be flashy or arrogant. Be yourself, but make sure the seller knows how passionate, energetic, motivated, and dedicated you are to the success of this business after you acquire it. Enthusiasm is contagious (so long as it isn’t obnoxious), and if the seller gets excited about your future of the company, he or she will feel much more comfortable financing it.
b) Be prepared. When you meet the seller, make sure you have done your homework. Know as much as you can about his company, his industry, and even his competitors. Don’t pretend to know more than he does, (you probably do not) but make it clear that you’ve went beyond the surface to understand everything you can. Give specific examples of experiences you or someone else have had with the company or their products/services if possible. If you are aware of recent news related to the industry, find a way to slip that into the conversation or into a question. I like to bring a binder with written documentation of my research, such as articles, print outs from the company website…etc. It’s a nice visual que to the seller that you are the real deal, and you’re well organized.
c) Dress the part. This may sound insignificant, but I can assure you it isn’t. First impressions are important, and if you show up in a Hawaiian shirt and flip flops, the seller will be less inclined to take you seriously (unless of course you are buying a tiki hut). This doesn’t mean you need to wear a 3-piece suit, and in some cases that might also hurt you. Business casual is a good rule of thumb, with slight adjustments based upon the environment you are walking into and type of business you’re looking at.
d) Be discreet & professional. It’s likely that the seller doesn’t want many people to know his business is for sale, and especially his employees. You need to help him keep it that way. If you are meeting on site, be careful what you say and when you say it. There is nothing wrong with pointing this out to the seller early and/or asking him if the employees know of the potential sale. You need to be equally discreet outside of the meeting. Keep the information confined to those who need to know, such as your family and/or advisors. Rumors spread fast, and if you are the source, it will hurt your chances of getting a good seller financing deal, or possibly any deal at all.
e) Be friendly and polite. Should go without saying, but important nonetheless. Remember, you want the seller to like you, and nobody likes a rude, unfriendly person. You don’t need to go over the top, but at the same time, don’t be shy about complimenting his business and thanking him for taking the time to meet with you.
f) Don’t point out negative aspects of the business. This doesn’t mean you can’t ask questions regarding areas you may be concerned about, but don’t just blatantly point them out, especially in the early meetings. There will come a time to talk about those more seriously in negotiations, but early on it will only drive a wedge in the relationship.
g) Ask GOOD questions. I like open ended questions the most (we have a comprehensive list of good questions in our guidebook here. This helps get the conversation going, and gets the seller talking about one his or her favorite topics… their business. It’s also your best chance to learn some things that you might not even have thought to ask. While asking questions, I advise that you do not sit there and write down every word or type them into a laptop. Instead, make eye contact and show the seller that you are really listening. You don’t want this to feel like an interrogation to the seller, more like a casual conversation about him/her and the business, while simultaneously learning everything you can.
I can’t emphasize enough the importance of building this relationship! We have an entire section in our Acquisition Guidebook dedicated to this subject, covering the above points and more in great detail. If you haven’t checked it out yet, I encourage you to do so.
We also have a free support forum here where you can interact with our staff and other like-minded entrepreneurs, so please join. I look forward to seeing you there and answering any questions you may have.
Institute for Business Acquisitions