Seller Financing: A Creative Way to Buy an Asset

Buying a business can require a prohibitive sum of capital – often hundreds of thousands or even millions of dollars. But what if you could purchase a business by using little or none of your own money? Even better, what if the business you buy could make the payment for you?

Introducing the concept of seller financing.

Consider this example. A local clothing business is selling for $300,000. You’ve gone through its financial records, you think the profit margins are healthy and you believe it could be a great company after making a few necessary changes. In fact, your plan is to buy it and work hard for a year, before hiring a manger to take over. You think this business could eventually become a passive income producing asset and your ticket to financial freedom.

But you face the same problem as most entrepreneurs: you don’t have enough cash to buy it. Not only do you lack $300,000, but the bank won’t lend it to you, either. You also aren’t comfortable with raising capital from investors. You want to own this company alone, without other shareholders. So, what do you do?

Seller financing

To bypass this common hurdle, you approach the business owner with a deal. You offer to pay more than what she’s asking, but in instalments rather than all at once. Instead of buying the company for $300,000, you offer to pay $350,000. You pay $10,000 today, followed by a monthly payment of $5,000 for the next 68 months. In essence, the seller is lending money so that you can finance your purchase.

A deal like this can be favorable for both parties. The seller may have to wait several years to reap the earnings from the sale of her company. However, she will make an extra $50,000 for doing so. Conversely, you only have to come up with $10,000. After signing a purchase/sale agreement, you then own the business. You can use the revenue it produces to pay the monthly instalments. If you break your agreement with the seller, she can take back the business.

Risk

Seller financing can add a layer of risk to purchasing a company. You will have to be sure that the business can afford the instalment payments. In the above example, you’ll need to set aside $60,000 per year for the seller. Taking over a firm can be difficult enough without the extra financial burden.

Conclusion

Done correctly, seller financing can give both parties what they want. The seller can liquidate her company and even charge a premium for having to wait. The buyer can purchase the business without having to part with an exorbitant amount of cash.

Obviously, the particulars of such a deal vary with each case. For example, the seller might want to conduct a credit check, learn more about your history or even request that you provide collateral. It’s also common for the seller to charge interest to prompt you to pay faster. For instance, your $350,000 purchase might come with a 7% annual interest rate. All of this will depend on how well you can negotiate.

Lacking cash is an obstacle, but it’s not restrictive if you are willing to be creative. Seller financing is just one of many ways to purchase an asset without costing you much.

About The Author

Alexis Assadi

Alexis Assadi is an investor, entrepreneur and writer, who advocates for making high-performing income investments and the lifelong pursuit of financial intelligence. He is a shareholder and director in three companies that provide funding to small businesses, entrepreneurs and real estate projects. His most recent venture is a firm called Pacific Income LP.

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