How to Buy a Business: Seller Financing
Should the owner help me buy his company by providing seller financing and how much should it be?
Yes, the seller should provide seller financing. In fact, seller financing is an absolute must when it comes to buying a business–especially a small one. Almost no individual buyer has the cash to purchase a business outright. So it becomes imperative for the seller to provide financing help. This is achieved by the seller taking an IOU note from the buyer which is to be paid off in anywhere from 3 to 10 years on average. The really small stuff is paid off in three years or less: pizza parlors, shoe repair shops, coffee shops, etc. Seller notes on bigger businesses will take 5 to to 10 years to pay off.
As to how much the seller should be willing to finance, the range can be anywhere from 66% to 80% or more. It all comes down to the particular transaction and the needs and abilities of both seller and buyer.
If a seller isn’t willing to provide financing, all that I can say is, run Forrest, run! An unwillingness to do this is a bad sign, one which should set off a lot of alarms. My first suspicion would be that the seller is not disclosing material information about something that’s likely to kill the business within months of the sale, so he just wants all of his money so that he can bolt to another state.
Am I being overly suspicious here?
No.
Never buy a small business without seller financing unless you’re Warren Buffet.
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