How Seller Financing Shapes SMB Acquisitions: Insights and Strategies

How Often Is Seller Financing Used in SMB Acquisitions?

Whether you are buying a small to midsize business (SMB) or planning to sell your own, the topic of seller financing has likely crossed your mind.

• Should you offer it as a seller?
• How much can you request as a buyer?

As a business broker, I want to share a personal opinion before diving into the data. In most cases, incorporating some level of seller financing can help bridge the gap for buyers and lead to a successful close.

What Does “Bridging the Gap” Mean?

Bridging the gap means helping the buyer reduce the upfront down payment required to secure financing for the transaction. Introducing a small portion of seller financing achieves several key things:

1. Lowers Financing Requirements: It reduces the amount buyers need to borrow from a bank, which in turn lowers their down payment.
2. Improves Loan Viability: By reducing the bank loan amount, the deal often looks more attractive to lenders, improving the debt service coverage ratio (DSCR) and overcoming potential hurdles in loan approval.
3. Keeps Sellers Invested: Seller financing keeps the previous owner somewhat involved in the business's success. While this isn’t the same as an earnout, it still ties a portion of the seller’s payment (typically 10-15%) to the business's ongoing success.

This setup reassures buyers and lenders alike. After all, the seller has a vested interest in the business thriving so they can fully cash out.

A Tool for Buyers and Sellers

Seller financing isn’t just beneficial for buyers; it’s a strategic tool for sellers as well. I understand that most sellers want the entire sale price wired to their account at closing. However, if offering 10% seller financing is what it takes to close the deal, doesn’t that make sense?

When used appropriately, seller financing can be the key to successfully closing a transaction, resulting in a win-win for both parties.

What Does the Data Say?

Now that I’ve shared my perspective, let’s look at the numbers. The following data comes directly from Axial, which analyzed 100 accepted Letters of Intent (LOIs) on its platform to highlight deal structures.

The Prevalence of Seller Financing

Every deal in the sample included some level of seller financing in its structure. While not every transaction requires it, the data suggests that seller financing plays a significant role in the majority of SMB acquisitions.

Who Are the Buyers?

It’s easy to assume that seller financing is mostly used by individual buyers or first-time business purchasers. While that’s partially true, the data reveals it’s more widespread. Let’s break it down:

• Family Offices: Family offices top the list with the highest median percentage of seller financing in their offers. This is largely because they focus on long-term investments and value-building relationships. By structuring deals with deferred payments, they allow sellers to stay connected to the business and earn interest on the balance.
• Independent Sponsors & Search Funds: These buyers often depend on outside funding or co-investors. Seller financing helps bridge the gap between the available capital and the business’s valuation, making it easier to close deals.
• Private Equity Firms: Backed by institutional capital and leveraged financing, private equity firms typically minimize their reliance on seller notes.
• Corporations & HoldCos: These buyers often fund acquisitions using cash reserves, enabling them to offer more upfront payments or negotiate smaller seller notes.
• Individual Investors: Individuals generally pursue smaller, simpler deals, which may naturally involve less seller financing.

Typical Percentages of Seller Financing

In most cases, seller financing falls in the 10-25% range of the total deal size.

For example:

• Larger percentages (80%+) are rare and often occur in special circumstances, such as family transactions, employee buyouts, or distressed acquisitions.

If you’re a buyer, I often recommend including 10-15% seller financing in your offer. For sellers, don’t be surprised to see this range in the first round of an LOI. There are always ways to negotiate high notes by reducing the term length and increasing interest rates on the note.

A Case Study: Creative Deal Structuring

Here’s an example to show how creative structures can reduce buyer stress and make deals happen:

Deal Overview:

• EBITDA: $3.2M
• Valuation Multiple: 4.45x
• Valuation: $14M

Typically, a buyer would need at least 10% down, or $1.4M. However, this deal used creative structuring:

• Earnout: 11.37% (linked to future business performance)
• Seller Financing: 11.23%
• Seller Retained Equity: 9.26%

This structure lowered the upfront cash requirement. The seller received 68.14% in cash at closing (approximately $9.53M). Instead of needing $1.4M for a down payment, the buyer only needed 10% of $9.53M, or $953K—a savings of nearly half a million dollars.

Final Thoughts

Seller financing is a powerful tool for bridging the gap and making deals happen. While it requires both parties to agree, creative structuring can open doors to successful transactions.

The hard part isn’t necessarily figuring out how to afford a business—it’s understanding how to structure deals and navigate the process. Surround yourself with a solid team and perform thorough due diligence after an executed LOI.

A big thank you to Axial for providing such valuable data.

If you’re looking to buy or sell a business, reach out to us at Kelliher Acquisitions. We’d be honored to help with your next transaction.