Seller Financing – The Unicorn of Biz Buying?

February 2, 2023 •

Whether you are looking to leave your W-2 job or simply looking for a higher return on investment (ROI) than you may be able to find in real estate or the stock market right now, there are some clear advantages to using Other People’s Money (OPM).

Borrowing money from a bank, through private lending, or through seller financing allows you to purchase a larger business and more profitable investment.

We get that debt can be scary, but you probably weren’t overly afraid of that big mortgage payment on your home and that likely doesn’t even cashflow. Imagine the mortgage that paid itself and you.

Is Bigger Really Better?

In our Contrarian Community we have this discussion a lot.

Let’s look at two examples:

EXAMPLE A – $100K CASH FOR $100K PURCHASE

Let’s say I have $100K to invest. And, I don’t want to take an SBA Loan and sign a personal guarantee.

My only option is to buy a business for $100K or less to leave some room for operating capital. If done well I might be able to find something fairly passive that might generate $3K a month or $36K per year. Not bad. We aren’t retiring tomorrow, but it’s still a decent play. 36% ROI on the $100K.’

Without growing the business, if I sold the company for the same $100K that would just be a break even on my capital. Even after 10 years of cashflow I would still only get my $100K back plus 10 years of cashflow.

AFTER 10 YEARS (Assuming no growth)

$100K + 10 ($36K) = $460K over 10 years or a 4.6X or around 15% compounding annually

EXAMPLE B – $100K CASH FOR $1 MILLION PURCHASE

But, let’s say, I meet with an owner and they are willing to sell me their business for $1 Million. And, they will take $100K today, and $900K over the next 10 years. Of course, they want 5% interest on their money though.

We have to make a few assumptions here that we might look for in a service-based business that we might buy. Whether it’s a plumbing company, a commercial landscaping company, roofing, etc, we are looking for around a 30% profit margin, and at this revenue probably a 3-4X multiple right now. In order to get the seller financing, we may agree to the $1 Million purchase price (at a 4X multiple) rather than negotiating something lower.

At a 4X multiple that means the business is making $250,000 a year in profit, and likely has annual revenue of around $750,000 based on a 30% profit margin.

What does this all mean? Well, $250K a year is roughly $21K per month in profit before debt service and hiring an operator.

If you wanted to quit your job and run this business as an operator, you could expect to earn $10,500 per month or $126K a year in your first year after paying back the loan payments ($9,545 per month) without growing the business at all. In my 7th FT year as a teacher, I made $55K per year. That would have been a hell of raise.

If I wanted this to be passive, I might hire an operator with field experience with a guaranteed salary between $60-$80K with upside bonuses for growth to put them into 6-figures. Then I would look to make them an operating partner with some ownership after a year or two, so they want to stay and build. This is how we turn even more people into business owners. At $70K guaranteed, I still make $56K per year on my $100K or 56% ROI.

I also get debt paydown on the company, so even without growth, if I were to turn around and sell the company for $1 Million after a year or two, I would potentially get more than my initial $100K down even without any growth. After 10 years I could get the whole $1 Million plus my $56K per year.

AFTER 10 YEARS (Assuming no growth)
$1,000,000 +10 ($56K) = $1.56 Million or a 15.6X or around a 29% return compounded annually

Why would a seller be willing to take seller financing?

Ok, we get why a business buyer would want seller financing, but why the hell would the seller being willing to accept this deal.

In real estate investing, seller financing was like the unicorn of all deals. Little to no cash to the table. Make repairs and rent for more than the payment, or turn around and sell for more money while only paying for repairs.

Learn how to find your win-win

The top 6 reasons why a seller would want seller financing:

Small businesses aren’t just flying off the shelves. Sure, certain segments are busier than others, but only 1 in 12 will sell in the next 6 months (bizbuysell.com)
They want to maximize the sale. If someone is willing to pay $900K with an SBA Loan, the seller gets $900K and then has to figure out a safe way to invest it to get a consistent return on their capital. If I pay them $1 Million with seller financing, they actually get $1.25 Million over the next 10 years including interest. That’s $125K per year, which is about half of what they have been earning while running the business FT, but now they can retire without giving up all of their income.
Many of these owners of off-market deals, don’t even think of selling as an option. We have run into several potential deals just like this that we had to walk away from because they had already told employees they would be shutting down. The employees had committed to other jobs, and we only wanted the business with the employees.
There are potential tax benefits to not taking $1.25 Million all at once. I am not an accountant, and I am definitely not giving tax advice here, but go talk with your accountant about this.
Both options are better than just walking away with nothing.
The seller wants to see their customers and employees taken care of 20 years in business. Maybe more than they care about the deal structure for the right new owner.

Still, think this isn’t possible? One of our Contrarian Community members, Renan, just closed on a deal for an $8 Million purchase price.

Here’s the breakdown:

Total Revenue: $8 Million

Total Profit: $2 Million

Purchase Price: $8 Million

Cash Down: $0

100% seller financing

Want to know why the seller wanted this deal?

They wanted the right new owner. They wanted to focus on another business that they owned, but the two businesses were correlated and both stand to grow faster when both businesses were growing. Renan proved to be the right owner.

Renan showed them exactly what they would be making with SBA Loans and other debt vehicles vs if they financing the deal themselves.

There were clear tax benefits for this seller.

And, if Renan screws up and can’t pay, they can just take the business back on default of the loan.

Limited risk, huge potential gains for both parties. They found the win-win.

If you want to learn how to find your win-win, make sure to check out our Contrarian Community and join several hundred others just like Renan making these deals happen.