Stop asking sellers if they want to seller finance! Do this instead...
I bet you’re all sick of hearing about seller finance. So was I. And so are 99% of people selling their business.
Here’s a trick to cut through that immediately with the sellers…
I can’t claim credit for this one — I actually learned of it from a book I read about the Trader Publishing roll up, called "Mergers and Acquisitions Strategy for Consolidations.
These guys were aggressively buying media companies all across the US, and built one of the largest media houses, with holdings such as Autotrader and Yacht World.
And they only put 40-50% cash down in their deals. That sounded absurd to me too, before I learned of their little positioning trick that made this happen.
(I’ve since used this time and time again, and it worked a treat).
First, as I always do when setting expectations with sellers, I start by mentioning that, as is the case with 99% of business sales, they will not get their cash upfront. There are many reasons for this, as I explain to them, such as the risk that if we pay them all the cash upfront, they may disappear the very next day, without us or the staff knowing how to carry on business, or there may be skeletons in the closet (undisclosed tax liabilities etc), or they may (and this is the kicker) just set up shop across the street in competition against us, potentially even taking staff and customers with them.
So, business sales NEVER happen with 100% cash upfront.
By this stage of the explanation, they’re fairly understanding - I mean, it’s basic logic. If they were in your shoes, as a buyer, they would have the same concerns (I’ve literally had sellers empathise with me, using those exact words).
So we proceed to explain our deal structure…
A downpayment (as discussed), and the balance paid as NON-COMPETE PAYMENTS.
Not seller financing, not vendor notes, nothing like that.
NON-COMPETE PAYMENTS.
I mean, they empathised with you in that they would be concerned about a seller setting up shop across the road too.
So we need to include non-compete payments within the deal structure as a matter of basic logic.
Then you go to the banks for the balance, instead of asking them for 100% of the cash, which never works well.
Here's a direct quote from the book: “Moreover, by characterizing most deferrals as noncompete payments, it incurred no interest costs, representing an interest-free loan for the period, effectively reducing the purchase price and increasing the return on investment.”
You would be shocked at how that tiny terminology-change has completely changed the tone of our conversations…
Give it a go, and thank me later.
Dim Niko