Seller Financing (Acquisitions) Seller financing is one of the best ways to finance an acquisition due to the excellent terms that buyers tend to receive. The problem is that not every seller will want to finance an acquisition. Historically, most small business acquisitions utilize some form of seller financing. It can be structured in a number of different ways. The structure of the seller financing contract will be dependent on the initial capital the seller wants, quality of the new management team, and the seller's future cash flow needs and tax considerations. The exact amount will depend on your ability to negotiate.
After negotiating with the owner, you can structure seller financing through a consulting contract, where the seller will continue to work for the company and receive a yearly salary. You should negotiate a contract and a rate of return that is appealing to both parties. The total payments made over the length of the contract should be calculated as a present value where the payments are discounted by the percentage return imputed in the contract. This will give you the opportunity to stretch out your payment over a number of years and give you a large tax write off. For the buyer, it will be beneficial as far as tax purposes are concerned. For instance, if you structure a consulting contract over ten years, the payments will be much lower than one bulk sum given to the owner who will then have to pay a larger tax on that sum.
