How to Buy a Business with Seller Financing that Makes Sellers Love You

seller financing is one of the best tools a buyer can use to buy an online business it can in the end help you buy a business for less money and overall less sales price on the actual business itself so let's dive into it on how you can use this tool to your massive advantage because buyers who do this well typically are the ones that buy over and over again what's up youtube greg here with another video today we're discussing the incredibly exciting world of seller financing so let's dive into it and hopefully i can make this topic that comes off a bit dry into something a little bit more fun if you need something to really inspire you to get into this video just know if you're really good at doing this you can become pretty wealthy and hey that's pretty exciting right i think leave a comment if it is okay let's dive into it so seller financing in general is a pretty easy concept to understand if you're buying a business say for a million dollars you say here's 700k mrs seller and they say sure pay me the other 300 000 over the next 6 8 12 months whatever right that's seller financing in a nutshell now within that kind of transaction there is a bunch of different things going on with all kinds of potential deal structures right but seller financing can be a fantastic way to mitigate your capital risk and in addition to that it is pretty much the only financial tool that is routinely available to you as a buyer because normal finance financial institutions just do not exist in this industry it's just not a thing that happens so because of that this is really the only thing you've got there are other financing uh institutions out there that might give you money usually it's going to be something like a personal guarantee which if you haven't seen my uh my video on uh how to buy a business for no money definitely check that out but basically you don't want a personal guarantee a personal guarantee alone is gonna mess you up with your actual house you live in the car you drive and all sorts of other things so do not do that wouldn't recommend it does it work yes it can i still don't recommend it but you could do it if you are super not risk adverse i guess you could do the personal guarantee but i don't recommend it anyhow we going back into seller financing this is one of the major major tools and we're going to dive deep in how to do it and at the end of this video i am going to share some of the why that using seller financing can give you a massive advantage when it comes to buying an online business let's dive in all right so how do we get this how do we get this beautiful thing known as seller financing well the first thing is to understand what kind of businesses would this be allowed on and that is almost purely going to be based off of the actual sales price so if you're looking at buying a business is 20 50 70 000 most of what i'm talking about this video just is not going to apply in those kind of scenarios really anything below two hundred thousand dollars typically you're not going to be able to succeed on a earn out like maybe anything above 150 but typically you're going to be beaten out by an all-cash offer so it's usually not even really worth doing an earn out on that scenario at least if you're using a marketplace like us where we have a big big buyer network competing for all sorts of deals it could work in a private deal though there is a chance you'd still lose the deal ultimately to someone just pays all cash the reason why you lose that is because if you didn't guess it sellers do not want to do this i mean if you think about it makes sense right i built a business up i the last thing i want to do if i'm deciding to sell it is hope that you pay me back sometime in the future for it right i want all my money now up front and there's not usually any benefit for me to allow you to do seller financing it's very rare that sellers get any kind of benefit from it at all and this extra risk because what happens if you don't pay me right which does happen it's rare on our marketplace i've seen it a handful of times or it's happened over the years but it definitely can and this is a very big cause of concern and fear in an entrepreneur right it would probably be in you too so you need to convince the seller to allow you to do an earn out and one of the best ways you can do that is convince them you're really going to pay them another thing that sellers might do and this could be even something you use to convince a seller to give you seller financing is some kind of added perk where you pay an interest rate on it like a like a loan or you pay a little bit extra on the multiple so they get a little bit of a bump for taking the extra risk of allowing you to do seller financing most seller financing really will begin around the five hundred thousand dollar level and stay to the end of this video and i will go over the best industry tier or not industries here the best pricing tier for online businesses where it does come to getting in our now okay now that we understand where we need to go to begin our search not the low level but kind of that mid-level or above seven figures let's talk about what the next step is to get this remember the seller does not want to do this they want as much money up front as possible typically so you need to convince them that it's in their best interest to do it so the one of the best ways to do that is find out what do they want why are they selling the business most entrepreneurs are going to tell you because i want the money duh what kind of question is that you know but there's usually a much deeper reason hiding beneath the surface of those waters that is a much more compelling and emotional reason you know it's not just about them wanting money why do you want the money well i want to go on this trip for the next six months all this kind of stuff uh you know i want to retire my wife or i want to pay off the house you know all these kind of things right so find out what the real reasons are ideally the emotional reason the desire of what they're doing put on your copywriting hat and see how you can't make your deal fit perfectly into that where the seller financing makes total sense so that is my first tip on that and the other thing is to consider how you can help them maximize their sale because that's what they want right they want to get the maximum amount of money for the deal and this goes back to what i just said about offering them that extra perk but hey look if you let me finance this deal with you and say we hit these revenue milestones i will pay you a bonus and ultimately you're going to get more than if i paid you up front right all these kind of stuff can be very very valuable to get the dialogue started in the right direction once this is all done and there is you know a real opportunity here to make an offer with an earn out or at least you feel like there is that's when you needed to start discussing terms and terms are the most powerful part of this whole deal because terms really decide everything you know there are famous quotes of investors that say like i will loan you anything as long as you let me decide the terms right yeah i'll loan you 30 million dollars where as long as the terms are where i pay you one dollar a month right you know stupid stuff like that terms are extremely powerful when used correctly and this should really not just be a benefit for you but the term should also in some way benefit the seller so again that they want to agree to them now real quick before we start talking about terms more in depth i want to talk about the idea of acquisition capital and working capital the more you leverage let's say you do a balloon style payment where uh you do earn out where you're paying a small monthly fee and then you pay a huge chunk all at once to the seller now if you do that in that kind of situation you narrow your ability to succeed in your business if something bad happens you're narrowing your margin of safety when really seller financing should be helping you with your margin of safety so i always say if you are looking to acquire business using your acquisition capital make sure you have 10 percent maybe even 20 of the actual purchase price of that business in working capital so if you see a business that's a million dollars even if you use seller financing at 700k i would still have that on 100 to 200 000 in working capital over here because this is your uh oh money right that something bad happens you have enough in your war chest to react in a good way to endure whatever storm that happens in the business and to make sure you pay that earn out to that seller right so i do still recommend having a good chunk of working capital if you use this but let's get into terms because again terms are one of the most powerful things you can do and you can really mitigate a lot of risk if you can agree with the seller on the terms of your desire all right let's talk about some really like two very common things that are discussed in terms when you're acquiring a business using some kind of seller financing and that is milestones and timeline so milestones can be a like the project succeeded on something it could even be related to the timeline and you can make it where your milestones are when you pay the earn out so let's say you have a milestone of hitting 5 000 net profit per month as long as you hit 5 000 net profit per month on the business you pay that seller their earn out now in this case the seller is incentivized to make sure that business does hit it so you got to keep them you keep them along a little bit almost as like free consultation in that sense to help you make sure the business hits that revenue number because they want to get paid right now milestones don't need to be tied like that they could also be tied to a project such as a web design refinish like maybe you are see like this huge opportunity in the business where you want to do like three four months of split testing and the milestone is when that split testing is done the earn out begins right something like that it could be done either way in terms of profit there's a subtle difference here between revenue and profit when it comes to a milestone you as a buyer usually are going to be much more awarded for doing it profit versus the seller will want you to do it with revenue now you might be wondering why that is and the reason why is kind of hidden in what i just said if you buy a business and let's say it is that five thousand dollar net profit uh to pay the milestone anything above that right uh and if it's tied to revenue instead of profit then the seller always gets paid as long as the revenue is above that certain agreed upon term right now if it's profit you can just go spend money every single month on web design more inventory new experiments new marketing experience all sorts of things to make sure you're always at 4 999 per month in profit so you don't have to pay this seller over here ever right as the business keeps growing this is a huge no-no you're not only going to ruin your reputation that seller's going to be wicked pissed at you if you keep doing this but most sellers are not even going to let you do it anyways most sellers will make you tie it to revenue for this reason but with that said if you can convince the seller to let you do a profit it is much much safer for you because is say there is a shitstorm that happens right a google algorithm update a amazon algorithm update or anything like that well you are protected and that seller if they agreed to the net profit the reason why you're not paying is because of something like this happen like they're not going to be happy but they're also not going to hate you right they understand what's going on so if you explain to the seller like you're not looking to screw them out by doing what i just you know what i just said about spending spending spending spending and instead you are really just looking to safeguard your investment from the unforeseen then when that happens if the unforeseen does happen the seller will understand and you know they're not going to be angry at you like they're going to be sad obviously they're not going to be they're going to be frustrated but they understand at the end of the day but that's the reason why sellers don't usually like it because of that fear you're never going to pay them back so that's milestones it can be tied to revenue it could be tied to net profit you tied to a project really anything your own creativity suggests like you're buying a sas business and say there's a you know a cto that needs to come over and stay with business with you for say uh 12 14 months or something like that you know maybe that is a milestone for that founder to really get paid out this is something you see quite often in bigger businesses so pretty much anything over uh 15 20 million dollars is more common than anything in the sub 10 million dollar space where there are like key employees that need to stay on with business post sale uh for the uh people who acquire the business to keep doing their thing uh to learn the ropes of the business so to speak and the entrepreneur gets paid out after that timeline or milestone is finished and as you can see milestone and timelines they're both pretty well connected but there is a difference when you do a timeline with the terms it can actually be much more set in stone than this variable of the milestone of whether it gets done or not if the like the most vanilla kind of seller financing or not that you can do is okay here's the money up front i'll pay you pay the rest back uh equally over six months 12 months 20 months whatever right so timeline is a much more definite end than the milestone which is more variable right both can be used great so in the sense of a timeline obviously the longer timeline for you is the best right but the chances of you getting a 30 year or now is very rare most earn outs in our space will be between 6 months and 18 months i think the longest one i've seen is around three years as a business gets bigger or more complex or with more opportunity there is chances for that earn out to grow longer depending on the deal structure right and in the sense of a business earn out growing longer the seller actually might want that if the terms are in their favor which is where they can ultimately get much more potentially significantly more than if they had just sold it uh with the upfront amount in mind so uh those are the two main things when thinking about uh seller financing is milestones and timeline and if you want a deeper dive onto different deal structures i'll leave a link down below to a blog post i wrote on the subject that dives into these kind of concepts a bit deeper for you so what are some of the ways you can make these terms benefit the seller because that's a theme throughout this whole thing because again sellers don't want to do this right they want all the money up front so you can do a lot of different things and almost all of it's tied to basically the common theme of giving getting the seller more money for taking their now than if they didn't and just sold at full list price so one way you can do that is uh interest payments on the on the loan the earn out itself you could offer uh quarterly bonuses to the seller if you guys hit like some stretch goal right uh like it doesn't have to be tied to the initial milestone but maybe it's something much much higher than the actual uh you know ground floor milestone right you can even even let the seller retain some sort of equity where they can see the upside in the business this is a great strategy because it doesn't technically cost you any extra money typically now you could argue it does but in a lot of ways it doesn't by giving this upside to the seller which is fantastic i want to do this for a lot of businesses but for businesses say uh 700k a million dollars and up it can be a real big attractive thing to a seller to give them a small amount of seller retained equity it doesn't have to be huge right it could even be something like five percent you know and they get some kind of upside for that passively for the remainder of the businesses life sellers love that kind of stuff so anything you do where one the terms protect you your capital risk right you want to make sure that if some problem happens in the business your working capital doesn't disappear paying an earn out right because you need that you need that money to survive the store but at the same time you want to make sure that the seller feels like they're protected that they can be confident entering in this deal this transaction with you because they're confident they're gonna get paid all right i told you i would tell you what is the best pricing tier to do in earn out to get the most amount of business for the least amount of capital and it probably won't surprise you but the best pricing tier is between five hundred thousand dollars and one million dollars at least in the amazon fba space we haven't looked at the data in the other business models but my guess is that that's pretty much the same for all business models because that's that awkward child stage where it's too big for most solopreneurs to buy and too small for a lot of private equity funded companies to buy so it is the one that is the toughest to sell in a lot of ways because it's in that awkward zone and if you want to see a breakdown of at least the amazon fbas stuff that pricing tier i'll leave a video link down below in the description and you can check out all the data we have on that so i hope you guys enjoyed this video hopefully it was entertaining and useful and not too dry and gave you some tips on how to become wealthy talk to you soon bye

Channel: Empire Flippers

Views: 7,808

Keywords: how to buy a business with seller financing, how to buy a buisness with seller financing, how to buy a business iwth seller financing, how to buy a buisness iwth seller financing, buying a business with seller financing, how to use seller financing for acquisitions, acquiring businesses with seller financing, Seller financing for businesses, sellonlinebusiness, empireflippers, ef, efflippers, flippa, quietlight, feinternational, M&A, affiliatesites, ecommercestores

Id: zfBewmJUrL4

Length: 17min 16sec (1036 seconds)

Published: Wed Oct 06 2021