Seller’S Financing - Searchfunder
I am curious to know if anyone here has experience in acquiring a company/business using seller’s financing? (seller’s earn out).
If so how did the business owner react? was it in a positive or negative towards the idea?
https://www.searchfunder.com/post/sellers-financing
Data on Revenue Growth and/or Margin Improvement i ...
Introducing Search Funds to New Zealand & myself t ...
Hi Gray - happy to speak about this if you'd like. All of the LOIs that I've put out include some level seller [redacted]
I've used seller financing by way of contingency payments with the book of business having to generate certain metrics before those payments are triggered. It's kept a vested interest in the success of the business on the seller and if the seller's business didn't perform lowered my risk. I've seen sellers who are overconfident that loved the idea at first realize that maybe the business wasn't as strong as they were advertising.
I heard on a podcast that seller financing is the way to go so that the current owner keeps skin in the game. It also was brought up on the podcast that it can be beneficial for both parties if the current owner keeps a minority ownership stake. Something to think about
It depends on your experience and what you bring to the table. I know there are people out there making it sound like if it was easy. Finding a seller of a PROFITABLE business willing to sell on seller finance is like finding a Black Swan. However 10% to 15% seller finance on a 5 year note is not uncommon.
We are currently finishing up an acquisition with 50% seller financing, all of which is delayed for the first five years on a $1.4M acquisition, and the business is very profitable. I talked to approximately 400 potential sellers in order to find this - so they are not very common, but they are out there. It's a numbers game. Ideally look for an older business owner, and pitch it to them as an easy way to retire with less tax liabilities.
Two types of seller financing, a Seller Note and an Earnout.
Seller Note: It is for risk mitigation and/or price preservation.
Price preservation when banks will not step-up. In this case the Note can be a larger %.
Risk mitigation to make sure what is being purchased is not a lemon. Typically 10-20% For larger transactions Seller Note is often zero, but there other mechanisms to achieve risk mitigation with 100% cash buyout.
Earnout: This is used, or should be used, when future
searcher University College London, University of London London Business School - 08/10/2021
Hi Mike, thanks for this. If the seller note is a guaranteed but delayed payment, I am unclear as to how this mitigates risk. If you put conditions/financial metrics on the payment of the seller note, can you help me understand how this differs from a performance-based earnout?
Could you also talk a bit more about the other risk mitigation mechanisms with 100% cash buyout?
Typical Seller Note has offset rights against R&W.. Also, if you default or intentionally do not pay seller note, a seller has to go through cost and effort to collect. This gives buyer some leverage for negative surprises post-deal. These is some risk mitigation.
An earn-out is due if there is performance. Once it is earned, for actual payment you still have risk mitigation discussed above.
There are two major formats of seller financing: an acquisition funded entirely by the seller or an earn-out or partial seller financing through subordinated debt (or preferred equity) where you're mitigating some of the forward earnings risk. In my experience, the fully seller-financed deals are rare; but it's very common for a seller to finance a 15-20% stake. I'm far from an expert here, but I believe the way the interest rates are structured (whether cash pay, PIK, or zero coupon) are negoti
I have done a deal before on seller financing. I have also seen several deals on seller financing. Typically its around 10-15% of the purchase price in a seller note payable over the course of 6months or a year with interest. Around 6%-10% apr is usually fine.
the above is based on my experience but then again every seller is different and every deal is different. It just depends on whos selling and what others are offering. This year acquisitions are moving very quickly and so its a sel
Deferred considerations are relatively standard practice. It improves the likelihood of buying a business that is stable, rather than one that has grown unsustainably.
They're very common in private deals - helps reduce your equity requirement on close and banks view it typically as equity, depending on the structure and maturity of the note
searcher Cornell University Texas Christian University - Neeley School of Business - 08/10/2021
Like many are saying here, it's not uncommon in SF deals, and it can provide a number of benefits to the buyer. As a searcher, I'd pretty much always have this option on the table unless the seller/manager is a clear hinderance to the company's performance, but that's usually not the case in companies worth buying.
As far as how a seller may react to seller financing, the worst they can say is that they're not interested in it. It really just depends on what their needs, expectations, and
searcher University of Texas at Austin Southern Methodist University - 08/11/2021
Super common. If this is a proprietary deal, the seller may not have the knowledge or expectation of seller financing, but any decent broker would have broached that with a seller during a process. As you search its helpful to lay out the levers that you can use to 1) bridge valuation gaps and 2) align incentives in highly illiquid, risk transactions. Earn-outs are commonly used for (1) and can be used for (2). Seller financing is generally used for (2) and sometimes used to make up for shortfal
Our current focus deal is 95% seller financed, they get a share in the growth which made it a no brainer for them.
This is very common. Seller financing also allows the seller to have some risk alongside the new owner which is a good sign and a key thing we look for during due diligence.