A seller note, also known as seller paper or seller debt, is when a person who is selling their business agrees to receive part (or all) of the sale proceeds over time instead of all at once. The seller gets paid in a series of debt payments after the sale closes.
Before you buy a loss-making business you must understand why it’s making losses, and how you fix the problem. But you also must know how long it will take to fix the loss-making problem, quantify the losses it will make until it’s profitable and have the necessary money to fund those losses.
You should ideally buy the type of business you know something about or have experience with from past work. But if you want to speed-up the process, and if you buy a larger business with employees that run the business, you may find it’s quicker and easier to buy a business you know nothing about.
To protect yourself from an earnout, include a clawback clause such that if sales or profits fall short post-acquisition, the seller must repay part of the sales price. Also, by funding the acquisition using seller financing, any clawback can be deducted from seller financing payments.
An earnout is when you buy a business, where part of the acquisition price is deferred and contingent on future sales or profits. The amount of the earnout will reflect the business’s performance, with any additional payment due tied to its success post-acquisition.
The seller of a business can lend a buyer the money to buy their own business, and this type of lending is called seller financing. Business buyers prefer seller financing because it’s quicker and easier to arrange than bank financing, which means it will be quicker for the business to be sold.