October 22, 2024
Adam Hoeksema
The idea of acquiring a business without putting any cash upfront is appealing to many buyers. But in practice, securing 100% seller financing is a rare scenario. With over 12 years of experience as an SBA lender, I’ve gained a deep understanding of what it takes to secure financing. During my time as the executive director of Bankable, I had the opportunity to approve more than 1,500 SBA loans across various industries. During those 12 years it was very, very rare to see an acquisition deal with seller financing anywhere close to 100%.
I saw a LinkedIn post by Clint Fiore that I thought was great. He’s an experienced business acquisitions expert who said the two easiest ways to get 100% seller financing is to either be way richer than the seller or be the child of the seller.
The first point is straightforward: if a buyer is much richer than the seller, the seller may feel comfortable offering 100% financing. The idea here is that the buyer's wealth acts as a personal guarantee, providing financial security. For example, if someone like Warren Buffett wanted to buy your business, you might agree to seller financing, trusting in his ability to pay, given his net worth of over $100 billion in 2024. However, you might also think: if the buyer is really rich, why not just pay upfront?
The second way to get 100% seller financing is through family ties. If the buyer is the seller’s child, there's more trust and flexibility in the financing terms. Sellers may want to keep the business in the family and help their child succeed without a big upfront payment, making it a natural part of succession planning.
For buyers who don’t fall into either of these categories, securing 100% seller financing is tough. Lenders and sellers usually want buyers to have "skin in the game,"—it means, they’ve invested their own money and are committed to the business's success. That's why SBA 7(a) loans, a common option for buying businesses, typically require a down payment of 5% to 20% of the purchase price.
The SBA (Small Business Administration) reports a 55% approval rate for SBA 7(a) loans, highlighting the challenges entrepreneurs face, even when they have some of their own capital invested. This rate indicates that lenders are selective about approvals, aiming to ensure that buyers are really committed to the business’s success. Each lender has its own rules, processes, and risk tolerance. If you don’t need a large loan - consider exploring lesser-known non-bank lenders, such as CDFI’s (Community Development Financial Institutions) or SBA Microlenders, which might offer more flexible options.
The Role of Seller Financing in Business Deals
Seller financing helps close business deals but usually isn't the only source of funding. It often serves to bridge the gap between what a buyer can borrow and what a seller wants. In fact, about 20% of small business sales include some form of seller financing, though it’s generally combined with other sources like SBA loans or personal savings. Understanding this dynamic is key for both buyers and sellers. While 100% seller financing is appealing, it’s realistically most feasible in situations where the business is struggling to attract buyers, or when the seller is highly motivated to exit quickly due to personal circumstances like retirement or relocation. Outside of these situations, securing such terms can be quite challenging, as most sellers prefer some upfront payment to reduce their risk. It’s important for buyers to explore all financing options and understand what lenders prioritize when evaluating deals.
Are you ready to start your business acquisition venture and secure the right financing? Check out our fully editable acquisition financial model template perfect for your business acquisition loan request.
