When I first started in the business of brokering businesses, I was told most all sales are seller financed. Not so today.
Often a cash offer is discounted by 10 – 20% because it takes away the Seller’s risk.
Even with SBA financing being as delightful as it is now, sellers do sometimes share in the risk a buyer has. These are some examples:
In each case a price is determined/negotiated for the business. Seller can demand proof of financial well-being and credit worthiness. Seller can also demand reporting of performance just as a bank would do.
Any offer needs to be fair and balanced.
Seller full financing: Usually when owner financing is involved, there is 30 – 40% down minimum and the note is amortized over a number of years, though no more than 10. There can be an early pay in full, say after year 3 of a lump sum.
Seller shares in financing with another, say an SBA loan:
The buyer must put down at least 5% with the owner financing 5% of total loan. The owner has to, in this example ’stand by’, get no payments over what is typically 10 years. However the Seller does earn a negotiated interest over that period. If the buyer pays off SBA loan, then seller can be paid off as well, before the 10 years is up.
OR, as example
The buyer puts down minimally 10% on SBA loan and seller finances perhaps 10% with SBA taking the balance of 80%. Seller can begin getting payments after, say, 1 month and does earn interest.
Owner is paid, say, 33% on day one.
At the end of the first year, retention of clients or revenue total either supports another 1/3 payment. If the retention is less than xxx seller gets less.
And, at the end of the second year, retention of clients or revenue total either supports another 1/3 payment. If the retention is less than xxx seller gets less.
(this is routinely done with dentists, doctors, etc where client/patient relationships can be key.)
Seller share in revenue:
Seller is paid a down payment.
For the next some number of years seller is paid a share of revenue until full purchase price is realized or some date certain. “revenue’’ is important as net income can be messed with.
It is most often a % of revenue.