100% Seller Financing

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May 18, 2023

by a searcher from Gonzaga University in Bend, OR, USA

I had a call with a seller this morning on a proprietary deal who is looking at a 6.5 multiple on $330k of SDE but open to 100% seller financing over 10 years at 0% interest.

Anyone on here done a 100% seller financed deal? Curious about terms, deal structures, DSCR, and things consider in this type of deal. I know this type of deal structure isn't talked about much. Thanks!

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Reply by a searcher
from Arizona State University in Boston, MA, USA
^redacted‌ That is a good question. In my humble opinion, 100% Seller Financing is a great way to get into a business. Here are a couple of ideas.

1) Most sellers are thinking of the big checks with $$$ in their eyes. So to delay the gratification is very rare and hard. If you can get an agreement, take it very seriously.

2) Brokers generally don't like it either because they may think their comp is threatened. So you are not sure how Advisors are branding or advising them. I highly suggest going the extra mile to ensure the advisor gets paid and paid well. But since yours is proprietary, you don't have to worry about it.

3) Buyers and Sellers should expect a healthy premium on the valuation and interest rate to compensate the Seller for taking the risk on you. Think of this as an Angel Seed or Series A round. Remember to put yourself in their shows and you would want a healthy premium as well. Is 6.5x on $330k SDE somewhat reasonable? Maybe. Depends on the business, business model, what it would trade at as a normal structured deal.

4) Valuation will largely be dictated by the debt service coverage ratio. Some say ~1.75x, which I think is low. I would think 2.0x+ should give you a decent comfort level. Consistency of earnings is also something that needs to be taken into consideration. If earnings are volatile, then you would want a higher coverage ratio, if they are consistent, then you might be able justify a lower. It's completely up to your comfort level.

Lastly, you have, in theory, and amazing opportunity, especially at 10 yrs amort, 0% interest, which may give you the coverage ratio you need. Good work! Keep up it up!
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Reply by a searcher
from Queen's University in Toronto, ON, Canada
While 6.5X may be high (depends on the industry, Intellectual property, competitive landscape, margin, etc), 100% seller financing at 0% over 10 years are amazing terms in high interest rate environment. Some folks may like the annuity aspect that this creates while being more tax efficient then a lump sum at close. Question would be if the payment are simply broken out evenly by month or more back ended. I think the structure is fantastic for keeping the seller close by incase you need help. Many times buyers have to add earnouts and other structures/carrots to a deal to ensure support from the Seller. Here you have 10 year alignment. The seller will want the money to keep coming in so he'll be incentivized to make sure you're successful. I will say to Jerome's point above, at present value of 5.5X that is a bit steep in my view but if you can find obvious growth or margin improvement opportunities to capitalize on, you could make great cashflow along the way.
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