So you’re ready to finally put some money where your mouth is and buy this small business. You did the due diligence. You wrote the letter of intent, and it’s starting to look like the numbers might actually check out.

What’s next? How to finance your M&A deal. When it comes to this side of the deal-making process, there are a few ways to go about it. 

Option 1: Pay in cash

As in…you’re on the hook for financing every part of the deal. You have high risk and high amounts of cash headed straight out of your pocket. 

Option 2: Get a loan.

You could lace up your fancy shoes and put on your dry clean only threads and head to the bank or the SBA office.

Option 3: Finance through the seller. 

By far the best option, is where your seller becomes the bank and the place where you’ll pay your down payment and the monthly payments on your loan term until the deal is paid off. 

Seller Financing is easily one of the most underutilized ways to finance an M&A deal, but it’s also one of the least risky out there.

Here are a few things you might not know about using seller financing for a deal:

1. With Seller Financing, There is More Negotiation Power in Your Deal Terms.

If you were to head to a bank to apply for a loan like a more traditional approach, chances are…you’ll also be asked to put up some form of collateral.

Traditionally, this can look like putting up other assets that you own (like your house, for example) or having someone else, like a spouse or business partner, co-sign on the loan with you. The problem with this is that it’s a really risky way to go about financing. 

Let’s say something happens in the business, like the possible scenario that the new business you just acquired slows down a bit during the first 90 days of transition. 

There you are, stuck with non-negotiable deal terms and locked in on a high monthly payment that wasn’t adjusted based on the business.

You can’t make the payments or your profit margin wasn’t quite what you thought it would be. That means that your deal that should’ve been adding cash to your pocket has turned into a cash-eating machine. 

2.  You can set the payment terms that work for you, not the bank.

This one comes back to giving you more control, too. The whole point of Seller Financing is to set up the payment terms so you can pay off your deal over time without also taking too much of your profit and money that would be in your pocket.

The simplest question you’ll want to ask yourself while structuring your payment terms is “How much money do I want to leave my pocket every month to pay back the original owner?”

Takes a little reverse engineering, but this is how you’ll be able to set your monthly payments and how long you’ll want to pay them off.

For example…

Let’s say I want to buy a business for $500k, but I don’t want to put up all the cash up front and I really don’t feel like dealing with a bank or the SBA office.

If I could find the right seller who’d be willing to do Seller Financing with me, my deal might look something like this. 

• Deal total: $500k 
• Down payment: $50k 
• Monthly payments to owner: $3.75k over 120 months

Here’s why I love deals like this. Let’s say the business I just bought is bringing in about $10k in profit every single month.

If my monthly payment for my deal sends that $3.75k over to the previous owner, I still get the other $6.25k of cash flow to myself.

And the best part? Because you’ve seen all of the financials during the due diligence process of your deal, you can adjust the terms to fit the business. Want lower payments over a longer period? Totally doable (so yes, you can actually have your cake and eat it too).

A word of caution though…Seller Financing isn’t for everyone. 

I’m usually a fan of financing through the OG owner for most deals, but sometimes, they’re not the right fit. This usually has to do more with the seller than the dealmaker. Here’s what I mean…

If you’re into buying boring businesses and are also considering using Seller Financing to secure your deal, your seller may not be as familiar with this approach to financing. They just might be a little old school. 

In my experience, I’ve found that you will most likely need to do a little bit of educating your seller about how it works, and there can sometimes be some apprehension on their side. 

Most of the time, your seller’s apprehension is focused on what would happen if you default on your loan payment and there is recourse. Does the seller have to eventually take the business back?

If your seller was hoping to ride off into the sunset, straight into retirement, this approach to financing might feel too risky for them. 

At the end of the day, most successful deals that are owner financed rely heavily on your own track record as a business owner and your ability to perform. 

An easy way to get around this is to show numbers for any previous businesses you’ve owned. How have you increased revenue in previous deals or another business? Do you have prior experience in this industry?

And if all else fails, you can put up additional collateral to your deal as well to make your owner feel more comfortable. When it comes to Seller Financing, the name of the game is flexibility. 

Want the inside scoop on how to have a conversation about Seller Financing during your deal-making process? We’ll walk you through exactly how to do it in our online course for small business buyers. 

…or if you’re really serious about buying up boring businesses and want the playbook and accountability AND support from us, our mastermind is where you gotta be. 

Yours Unconventionally,

Codie & Ryan

Co-founders – Unconventional Acquisitions

If you want to learn more about how to find and buy businesses, check out these articles👇

• Is Business Buying Right For You?
• How to Buy a Business While Working a Full-Time Job
• The 5 Most Common Mistakes When Buying a Business Through M&A

You can also register for the course here OR if you are serious about buying a small business, join our mastermind.