Seller financing: how to buy a business with no money down, and the catch with it

How do you buy a business with no money up front? The question comes up constantly with buyers I act for, and the answer is usually seller financing. The seller effectively lends you part of the purchase price, and you pay it back out of the business you have just bought. It is a genuine route to an acquisition without a large deposit, but it has a real downside, and the terms need to be negotiated and written into the share purchase agreement properly.

What is seller financing?

Seller financing is an arrangement where the buyer of a business puts little or no money down at completion and takes ownership of the business straight away. The balance of the price is paid later, out of the revenue or profits that the business generates once the buyer owns it.

In effect, the seller is lending money to the buyer. Instead of a bank, the person providing the credit is the person who built the business, and their repayment comes from the trading of the very business they have just sold. In legal terms the unpaid part of the price is deferred consideration: money that is owed under the share purchase agreement but is paid on agreed dates after completion rather than on the day.

Benefits of seller financing for buyers

Two advantages stand out for a buyer.

• You need far less cash up front. The most obvious benefit. A buyer who cannot raise the full price from their own funds or from a lender can still get the deal done, because part of the price is pushed into the future.
• The deferred payments can be linked to performance. If you are using specialist acquisition lawyers, they may be able to negotiate that the payments due after completion are contingent on the target business achieving certain financial outcomes. The usual example is profit: the later instalments only fall due in full if the business generates the profit the seller told you it would.

That second point is the one I find buyers underestimate. It is a form of protection. You are buying on the strength of the seller's numbers, and tying the deferred price to profit means that if the business does not perform as expected, you end up paying a lower purchase price. The seller carries some of the risk that their own figures were optimistic.

Disadvantages of seller financing

There is one main disadvantage, and it is about people rather than paperwork.

Once completion has happened, the business is no longer the seller's. But the seller still cares deeply about it, because it is the source of the money they are owed. In my experience that means the seller will be very involved, or will want to be very involved, in how the business is run after they have sold it.

That creates a "too many chefs in the kitchen" problem. You and the seller may disagree on how the business should be managed and what decisions should be taken. Those disagreements can lead to a relationship breakdown and to stagnation, where the business cannot move forward or improve because the two of you are pulling in different directions.

So before you agree to seller financing, be honest about whether you can work alongside the seller for the length of the repayment period, and think about how much say they should have in the business while they are still owed money.

Is 100% seller financing realistic?

It is uncommon for a seller to be willing to hand over 100% of their business for zero money up front. That does not mean the idea is dead. A more typical outcome is a negotiated split: a much smaller percentage of the price is paid on completion, and the remainder is deferred consideration paid over time.

The right split depends on the deal, the seller's circumstances and how much confidence each side has in the numbers. The point is that seller financing is usually a partial solution that reduces the cash you need rather than removing it entirely.

How to negotiate seller financing terms

Seller financing is not a handshake arrangement. The deferred consideration, the payment dates and any conditions attached to the payments all belong in the share purchase agreement. In practice that means:

• Agree the split. How much is paid on completion and how much is deferred.
• Agree the payment schedule. When each deferred instalment falls due.
• Agree any performance conditions. If the later payments are to depend on profit or other financial outcomes, define exactly what is measured and how.
• Deal with the seller's involvement. Decide what role, if any, the seller has in the business while money is still owed.

Alongside those terms, a well-drafted share purchase agreement will contain other clauses that protect you as the buyer and reduce your risk. The financing terms are one part of a wider negotiation, and they tend to work best when they are handled together with the rest of the agreement rather than bolted on at the end.

Next steps

If you are considering buying a business with little or no money down, start by testing whether the seller is open to a deferred structure and what proportion they would accept up front. Then speak to a corporate solicitor with acquisition experience before anything is agreed in writing, so that the deferred consideration, any performance conditions and the seller's post-completion role are properly documented in the share purchase agreement.